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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21185
APPLIED ANALYTICAL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2687849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5051 NEW CENTRE DRIVE, WILMINGTON, NC 28403
(Address of principal executive
office) (Zip code)
Registrant's telephone number, including area code: (910) 392-1606
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K of any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's common stock, as of March
19, 1999 was 17,204,490 shares. The aggregate market value for the voting stock
held by non-affiliates of the Registrant on March 19, 1999 was approximately
$113,039,189.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1998 Annual Report to Shareholders are incorporated
by reference in Parts I, II, and IV hereof. Portions of the Registrant's 1998
Proxy Statement dated approximately April 9, 1999 are incorporated by reference
in Part III hereof.
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PART I
ITEM 1. BUSINESS.
The terms "Company", "Registrant" or "AAI" in this Form 10-K include
Applied Analytical Industries, Inc., its corporate predecessors and its
subsidiaries, except where the context may indicate otherwise. The Company was
incorporated in 1986, although its corporate predecessor was founded in 1979.
AAI operates in two business segments which include a fee-for-service business
and a product development business. Financial information by business segment is
included on pages 33 and 34 of the 1998 Annual Report to Shareholders (the
"Annual Report") and is incorporated herein by reference.
In the fee-for-service business, AAI is a leading integrated contract
research and development resource to the worldwide pharmaceutical and
biotechnology industries, offering an efficient, variable cost alternative to
its clients' internal drug development, compliance and quality control programs.
The Company provides a broad array of value-added services, including chemical
analysis, synthesis and other laboratory services; drug formulation development;
bioanalytical services; clinical supply and niche manufacturing; and regulatory
and compliance consulting.
In addition to the analytical services, AAI offers clinical trial
services on a fee-for-service basis. The clinical business allows AAI to
leverage customer relationships by offering longer term, broad scope contracts
which span from early developmental testing and formulation to post-approval
analysis. The clinical group provides customers a single source provider of
pre-clinical and clinical testing. Being a single source provider of services
can decrease the amount of knowledge transfer lost between separate vendors and
can ultimately decrease the cost of development and speed to market of a drug.
AAI has contributed to the submission, approval or continued marketing
of client products worldwide, encompassing a wide range of therapeutic
categories and technologies. The Company believes that its ability to offer an
extensive portfolio of high quality drug development and support services
enables it to effectively compete as pharmaceutical and biotechnology companies
look for integrated drug development solutions that offer cost-effective results
on an accelerated basis.
In addition to the fee-for-service business, AAI leverages its expertise
by allocating a portion of its technical resources and operating capacity to
internal drug and drug technology development. The Company generally funds the
expense of development and then participates in the benefits of any potential
commercial success through licensing and royalty arrangements. The Company does
not directly market its internally developed products. Licensing partners, who
are generally pharmaceutical companies, provide all marketing and sales service.
Internal drug development efforts encompass generic products, line extensions
and new patented technologies. Certain of these products have been licensed or
sold. The Company's proprietary technology includes patents and pending patent
applications on formulations, methods and drug delivery vehicles. The Company
has only recently begun to recognize significant license and royalty revenues
from its internal development efforts because of the significant time required
for development and regulatory approval of pharmaceutical products.
In 1994, as part of its internal development program, the Company
organized Endeavor Pharmaceuticals Inc. ("Endeavor") to develop certain hormone
pharmaceutical products, focusing initially on several such products then under
development by AAI. The Company owns approximately 40% of the fully diluted
common equity of Endeavor.
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On December 31, 1996, the Company acquired L.A.B. Gesellschaft fur
pharmakologische Untersuchungen mbH & Co. ("L.A.B."). L.A.B. was a European
contract research and development organization headquartered in Neu-Ulm, Germany
with principal operating units in Neu-Ulm and Munich, Germany; Paris, France,
and Arnheim, Netherlands as well as a sales office in London, England. The
former L.A.B. operations are now included in the organization referred to as AAI
Europe. AAI Europe focuses on both clinical and non-clinical pharmaceutical
product development and provides services that include drug formulation
development; chemical analysis; Phase I clinical trial studies; bioanalytical
testing; and European regulatory consulting. AAI Europe also provides Phase
II-IV multi-center clinical trial studies focused in niche therapeutic areas
including hepatic disease, chemotherapeutics, and hormone replacement therapy.
On September 14, 1998, the Company acquired Kansas City Analytical
Services, Inc. (KCAS) a bioanalytical services company in the Kansas City,
Kansas area. KCAS offers bioanalytical testing of products to large and small
pharmaceutical development companies. The addition of KCAS significantly
increased AAI's bioanalytical testing capacity.
On March 16, 1999, the Company merged with Medical and Technical Research
Associates, Inc., (MTRA) a clinical research organization located near Boston,
Massachusetts. MTRA offers clinical phase II - IV studies predominately in the
US market to large and small pharmaceutical companies. The addition of MTRA adds
clinical phase II - IV capabilities in the United States and will significantly
increase AAI's ability to provide clinical testing to U.S. customers and enable
the Company to compete for global clinical trial engagements.
FEE-FOR-SERVICE BUSINESS
The Company provides a broad array of drug development services,
including chemical analysis, synthesis and other laboratory services;
formulation development; bioanalytical services; clinical supply and niche
manufacturing; clinical trial services and monitoring; and regulatory and
compliance consulting. The Company assigns project management teams consisting
of customer service representatives and technical employees that meet with
clients at frequent intervals to monitor and guide projects through the
development process. Continual client interaction allows the Company to
efficiently manage the drug development process.
Historically, the Company's laboratory services have accounted for
approximately one half of its fee-for-service revenue, although relative amounts
vary from year to year. Formulation development projects and clinical supply and
niche manufacturing generally have contributed the major portions of remaining
annual fee-for-service revenue.
LABORATORY SERVICES
In support of drug development and compliance programs, the Company
offers laboratory services to characterize and measure drug components and
impurities. The Company has more than 19 years experience in providing
analytical testing services dedicated exclusively to the drug industry and has
developed the scientific expertise, state-of-the-art equipment and broad range
of scientific methods to accurately and quickly analyze almost any compound or
product. The Company's laboratory services include method development and
validation; stability studies; raw materials and release testing; biotechnology,
microbiology and bioanalytical testing; product characterization and organic
synthesis.
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METHOD DEVELOPMENT AND VALIDATION. The Company develops and validates
methods used in a broad range of laboratory testing necessary to determine
physical or chemical characteristics of compounds. Analytical methods are
developed to demonstrate potency, purity, stability or physical attributes.
These methods are validated to ensure the data generated by these methods are
accurate, precise, reproducible and reliable and are used throughout the drug
development process and in product support testing.
STABILITY STUDIES. The Company provides stability testing and secure
storage facilities necessary to establish and confirm product purity, potency
and other shelf-life characteristics. Stability testing is required at all
phases of product development, from dosage form development through commercial
production, to confirm shelf life of each manufactured batch. The Company
maintains state-of-the-art climate-controlled facilities in the United States
and Germany to determine impact of a range of storage conditions on product. FDA
regulations and the regulations of European regulatory authorities require that
samples of clinical and commercial products placed in stability chambers be
analyzed in a timely fashion after scheduled "pull points" occur, based on the
date of manufacture. The Company's proprietary Laboratory Tracking System (LTS)
tracks client products maintained at the Company's stability storage facilities
and automatically schedules required testing as pull points occur.
RAW MATERIALS AND PRODUCT RELEASE TESTING. The Company offers testing
required by the FDA and other regulatory agencies to confirm that raw materials
used in production and resulting finished products are consistent with
established specifications. Due to the incorporation of "just in time" inventory
control systems in client production schedules, release testing for both raw
materials and the finished product often cannot be scheduled by clients in
advance, yet must be performed immediately. The Company believes that its
internal scheduling systems, analytical laboratory expertise and systems for
prompt testing provide it with a competitive advantage in providing both raw
material and batch release testing. The Company believes that this service
enhances its client's confidence in adopting cost-saving "just in time"
inventory control systems.
BIOTECHNOLOGY ANALYSIS AND SYNTHESIS. Although the types of analytical
investigations of biotechnology products are similar to those required for more
traditional pharmaceutical products, the complex molecular structure of many
biotechnology products requires different technology and expertise. The Company
provides a broad array of biotechnology services, including both analytical and
biological testing and method development and validation. AAI's breadth of
services allows the Company to rapidly deduce and characterize the complex
structure of the biotechnology product and measure the molecule or its
metabolites in human blood plasma to support clinical trial evaluation. The
Company has expertise in a broad spectrum of biochemical and immunochemical
methods for characterization and analysis of biotechnology drugs. These methods
include amino acid sequencing, amino acid analysis, peptide mapping,
carbohydrate and lipid analysis and electrophoresis. The Company also has
expertise in developing chromatographic methods that precisely evaluate the
purity and stability of biotechnology products. This service breadth and
diversity of analytical skills and technologies enable the Company to assist its
clients from early product development through the investigational new drug
application and product license application stages and commercial production.
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MICROBIOLOGICAL TESTING. Microbiological testing is an essential
indicator to ensure that a drug product, whether raw material or finished
product, does not contain harmful micro-organisms. The Company has significant
experience conducting various microbial tests to identify and quantify
micro-organisms that may be present, including limulus amebocyte lysate testing,
which measures toxic byproducts of micro-organisms, and particulate matter
testing to determine the presence of foreign matter in injectable drug products.
The Company also performs sterility testing to identify the genus and species of
any micro-organisms that are present. In addition, the Company performs tests to
determine the effectiveness of antibiotics against micro-organisms and the
minimum levels of preservatives necessary in product formulations.
The Company also assists clients with environmental monitoring, including
water and air systems testing, using an automated biochemical system to identify
micro-organisms present and determine whether such systems are within applicable
microbial limits. The Company assists clients in validating their environmental
control systems to ensure compliance with Good Manufacturing Practices (GMP)
regulations.
BIOANALYTICAL TESTING. The Company offers bioanalytical testing services
to support clinical trials, analyzing plasma samples to characterize the
metabolized forms of the drug and determine the rate of absorption.
Bioanalytical studies of new drugs often present challenging and complex issues,
with products being metabolized into multiple active and inactive forms, each of
which must be measured. The Company works with its clients to develop and
validate analytical methods to permit detection and measurement of the various
components to trace levels. The acquisition of L.A.B. in 1996 and KCAS in 1998
significantly enhanced the Company's bioanalytical capabilities.
PRODUCT CHARACTERIZATION. The Company has the expertise and instruments
required to identify and characterize a broad range of chemical entities.
Characterization analysis identifies the chemical composition, structure and
physical properties of a compound, and characterization data forms a significant
portion of a regulatory application. The Company uses numerous techniques to
characterize a compound, including spectroscopy, chromatographic analyses and
other physical chemistry techniques. Additionally, the Company uses such
information for control testing to be performed throughout development and
marketing to confirm consistent drug composition. Once appropriate test methods
are developed and validated, and appropriate reference standards are
characterized and certified, the Company can assist clients by routinely testing
compounds for clinical and commercial use.
ORGANIC SYNTHESIS. The Company develops synthesis methods for producing
experimental quantities of new compounds needed for analytical characterization,
toxicological studies, formulation development and clinical trials. Through
organic synthesis techniques, the Company can produce reference standards of the
active compound, specific impurities, degradation by-products, bioassay
reference standards or molecular analogs to permit sufficient quantities of such
compounds to be separately characterized and studied.
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FORMULATION DEVELOPMENT SERVICES
The Company provides integrated formulation development services,
enabling the Company to take a client's compound and develop a safe and stable
product with desired characteristics. The Company believes its formulation
expertise and extensive analytical capabilities enable it to provide an
efficient, seamless development program, with a dedicated project team tracking
the product through all stages of formulation development. The Company provides
formulation development services to its clients during each phase of the drug
development process, from new compounds and modifications of existing products
to generic versions of branded products. The Company's formulation development
projects may support a small segment of critical development activities or may
last for several years going from early formulation development to optimized and
validated production-scale, packaged product.
The Company's formulation development expertise spans a broad spectrum of
therapeutic areas. The Company works with clients to develop products with
desired characteristics, including dosage form, strength, release rate,
absorption properties, stability and appearance. The Company has developed
significant product and process capabilities that enable it to efficiently solve
the complex problems that arise in developing formulations with targeted
characteristics and has developed a range of proprietary product technologies
that allow it to efficiently achieve desired results in product design and
development.
In providing formulation services, the Company works closely with clients
to design and conduct feasibility studies to chart the potential of formulating
a drug using a combination of active drug ingredients and inert materials called
excipients. Using experimental designs, initial prototype formulations are
prepared to identify potential problems in stability, bioavailability and
manufacturing. Generally, formulation development is an iterative process, with
numerous initial formulations being modified as problems are encountered. The
Company believes its experience and expertise in formulation development, as
well as certain proprietary technologies, permit it to design efficient
protocols for identifying and optimizing prototypes with the greatest potential.
Upon selection of the final product prototypes, the Company develops
protocols to scale the product batch size from development stage (hundreds to
thousands of units) to clinical scale (thousands to millions of units). During
the clinical phase the Company refines the formulation in response to clinical,
bioanalytical and stability data. The manufacturing scale-up process involves
identifying and resolving manufacturing problems to facilitate an efficient
transfer to the full-scale production equipment of the Company's clients.
Throughout the development process, the Company develops and validates the
analytical methods necessary to test the product to establish and confirm
product specifications.
In addition to new drug development, the Company offers product
modification and line extension services to clients, generally for marketed
products facing patent expiration. Modifications of existing products offer the
Company's clients an opportunity to improve product characteristics, increasing
product market viability. Improved product characteristics include enhancement
of stability, absorption profiles (e.g., quick or sustained release), taste and
appearance. Product line extensions may include new dosage forms such as solids,
liquids and chewables, as well as new dosage strengths. Product modifications
and line extensions offer clients the opportunity to target new patient
subpopulations and improve patient compliance. The Company also offers
formulation services to clients seeking to develop generic products.
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CLINICAL SUPPLY AND NICHE MANUFACTURING
The Company provides clinical trials materials for Phase I through IV
clinical trials. The Company has expertise in manufacturing tablets, capsules,
sachets, liquids and suspensions, creams, gels, lotions and ointments. The
Company believes that outsourcing of clinical supply manufacturing is
particularly attractive to pharmaceutical companies that maintain large,
commercial-quantity, batch facilities, where clinical supply manufacturing would
divert resources from revenue-producing manufacturing. Similarly, pharmaceutical
companies often seek to outsource commercial manufacturing of small quantity
products. The Company has a dedicated 20,000 square foot facility in Wilmington,
North Carolina and a similar facility in Paris, France to distribute and track
clinical trial materials used in clinical studies. In addition, the Company
provides its clients assistance in scaling up production of clinical supply
quantities to commercial quantity manufacturing, and manufactures inventory on
behalf of clients for commercial sale while client production facilities are
being built and validated.
The Company's manufacturing facilities and equipment are qualified and
validated to operate under GMP regulations.
REGULATORY AND COMPLIANCE CONSULTING
The Company assists in the preparation of regulatory submissions, audits
a client's vendors and client operations, conducts seminars, provides training
courses, and advises clients on applicable regulatory requirements. The Company
also assists clients in designing development programs for new or existing drugs
intended to be marketed in the United States and Europe. At the client's
request, the Company will either review client prepared submissions or draft
sections and assemble regulatory packages and attend FDA meetings with clients.
The Company assists clients in preparation for FDA inspections and assists them
in correcting any deficiencies noted in FDA inspections. In preparation for an
FDA inspection, the Company's regulatory affairs specialists conduct mock
inspections to anticipate FDA observations and advise clients of appropriate
remedial actions. The Company also audits manufacturers of active and excipient
ingredients used in the drug product, as well as packaging components, on behalf
of clients to ensure that the manufacturers' facilities are in compliance with
GMP regulations. Such audits generally include review of the vendor's drug
master files, analysis of written standard operating procedures ("SOP"), review
of production records, and observation of operations to ensure that written
SOP's are being followed. Audit reports include recommendations to address any
deficiencies. The Company also advises clients on validation issues concerning
their systems and processes and audits client facilities to assist them in
validating their processes, cleaning, water and air handling systems.
The Company leverages its in-house laboratory training programs by
providing training to clients' employees. In addition, the Company organizes and
conducts seminars worldwide on a number of topical industry issues.
CLINICAL SERVICES
The Company has a 48-bed Phase I clinical trial facility located in the
same facility as one of the Company's analytical laboratories in Research
Triangle Park, North Carolina. With the acquisitions of L.A.B. and MTRA, the
Company expanded its Phase I clinical trial capabilities and added the ability
to conduct and monitor Phase II-IV studies and multi-center trials focused in
niche therapeutic areas, including hepatic disease, chemotherapeutics and
hormone replacement therapy. The Company's Neu-Ulm, Germany operations include a
120-bed facility for conducting certain Phase I and II clinical trial studies,
as well as bioequivalency studies. The newly expanded facility in Paris, France
allows the Company to perform as a Phase II-IV multi-center clinical trial
operation serving many European pharmaceutical companies.
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MTRA provides a full range of Phase II-IV clinical services to customers
in the pharmaceutical, biotechnology and medical device industries for
assistance in the drug development and regulatory approval process in North
America. The clinical services include clinical trial management and monitoring,
data management and statistics.
With the addition of MTRA in 1999, the Company anticipates that clinical
services will contribute more significantly to total revenues as clinical
services will be offered on a global scale and have a significant customer base
in the United States.
PRODUCT DEVELOPMENT BUSINESS
The Company dedicates a portion of its technical resources and operating
capacity to internal drug and technology development with the objective of
licensing marketing rights to third parties. The Company does not independently
commercialize products developed internally or otherwise directly compete with
its clients in the marketing or distribution of products and, accordingly,
believes that its internal development efforts are complementary to its clients'
development needs. The Company's internal product and technology development
program has resulted in multiple product applications filed with the FDA and
European regulatory agencies. Many of these products have been licensed or sold.
The internal development program has also resulted in patents covering drug
technology and pending patent applications
Since 1993, the Company has significantly increased its investment in its
internal product development program. Because of the length of time required for
development and approval of pharmaceutical products, the Company has only
recently begun to recognize significant license revenue from its internal
development efforts. The Company anticipates that internal product development
revenues, including royalties and milestone license payments, will represent a
growing proportion of its revenue. However, there can be no assurance that
internal development projects will yield products that will be approved by the
appropriate regulatory authorities or will be attractive to potential clients.
Although there is a risk that any particular development project may not produce
revenues, the Company believes that the profit margins from successful drug and
technology development projects could potentially exceed the margins for
standard fee-for-service engagements.
In 1994, as part of its internal development program, the Company
organized Endeavor with certain financial investors and an affiliate of Schering
AG to continue the development of certain generic hormone products then under
development by AAI. The Company assigned its rights to such products to Endeavor
in return for approximately 47% of Endeavor's equity during a private placement
of Endeavor stock, and the Company entered into a contract with Endeavor to
continue product development and clinical supply manufacture. AAI currently owns
approximately 40% of the fully diluted common equity of Endeavor. The Company's
fee-for-service net sales to Endeavor were approximately $1.6 million, $3.2
million and $6.2 million in 1998, 1997 and 1996, respectively. The Company
believes that such services are provided at terms that are no less favorable
than terms that would be obtained from an unrelated third party.
Endeavor had one product approved by the FDA in 1998 and is currently
developing another product, in multiple dosage strengths; however, there can be
no assurance that such product will ultimately be approved by the FDA. Endeavor
does not directly market any products and its revenues are dependent upon
licensing fees and royalties from third parties. Continued product development
by Endeavor is dependent upon revenues from the approved product or additional
capital funding.
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In 1995 the Company entered into an agreement with Aesgen, Inc.
("Aesgen"), a company organized by the Company with an affiliate of Mayo Clinic,
MOVA Pharmaceutical Corporation and certain financial investors, to develop
certain pharmaceutical products. AAI recognized net sales to Aesgen of $.2
million, $1.9 million and $4.7 million in 1998, 1997 and 1996 respectively. In
1996, the Company sold to Aesgen marketing rights to a product being developed
by the Company. Under the agreement, Aesgen will pay license fees and additional
royalties upon marketing the product, although there can be no assurance that
the product will be approved by the FDA or marketed. AAI continues to hold a
$1.6 million non-voting, non-convertible preferred stock investment in Aesgen.
In addition to its development work for Endeavor and Aesgen, the Company
has continued its internal development of products to be licensed to third
parties that have marketing and distribution capabilities. The Company has
entered into numerous license agreements for products that are currently in
development. The terms of the license agreements vary as to amounts of milestone
payments, as well as methods and extent of revenue participation. While the
Company anticipates that most of its product license agreements will provide
that prospective clients will ultimately sponsor the approved product, in
certain instances the Company has made submissions for internally developed
products in its own name.
Continuing to leverage its development capabilities, the Company has
moved into product line extension development and has also begun reviewing new
compounds that are chemically similar to currently marketed products with proven
therapeutic and safety profiles, and that offer improved characteristics over
the marketed product. Such improved characteristics would include enhanced or
new therapeutic indices, reduced side effects, improved bioavailability and
improved pharmacokinetics. Because considerable toxicity data already exists for
the marketed product, the Company believes that product lines extensions and
pro-drugs generally could be developed with less risk of failure and in a
shorter time frame than new chemical entity development. The Company believes
that virtual and limited-resource drug companies provide opportunities to enter
into collaborative ventures to identify and develop these types of compounds.
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TECHNOLOGY DEVELOPMENT PROGRAM
As an adjunct to the internal development program, the Company has sought
to protect certain intellectual property it has developed relative to the drug
development process. The Company has established a patent committee that meets
regularly to review employee-generated submissions of possible patentable
subject matter. The patent committee reviews the novelty and usefulness of the
submission and, with input from the marketing department as to commercial
viability, determines to either pursue a patent application or designate the
submission as a trade secret.
The Company's internal development program has yielded multiple issued
patents and has several pending applications. For example, the Company's
patented Pro-Sorb(R) formulation technology has been shown to facilitate the
oral absorption of a number of non-steroidal anti-inflammatory drugs or NSAIDs,
such as diclofenac, to reduce gastric irritation and speed the onset of
therapeutic activity. In addition, the Company has patented a novel oral
delivery system for certain biotechnology compounds that may currently be
administered only by injection.
The Company has one licensing agreement for a patented technology for the
manufacture of low-dose products which are typically difficult to uniformly
blend and an additional licensing arrangement for its patented chewable
formulations to mask the otherwise bitter taste of certain ulcer drugs. The
Company is seeking licensing partners for its other recently developed
technologies.
INFORMATION TECHNOLOGY
The Company has made significant investments in information technology.
The Company's proprietary LTS system tracks laboratory workflow and enables the
Company to monitor and plan work through the Company's laboratories. The LTS
system monitors the progress of a client's project, records time expended by
laboratory personnel, tracks sample locations and controls document revisions.
The Company's customized data management system connects analytical instruments
with multiple software architectures permitting automated data capture.
The Company believes that information technology will enable it to
expedite the development process by designing innovative services for individual
client needs, providing project execution, monitoring and control capabilities
that exceed a client's internal capabilities, streamlining and enhancing data
presentation to the FDA and enhancing its own internal operational productivity
while maintaining its quality.
In 1998, the Company began implementation of an enterprise wide financial
and operational integrated management information system including significant
systems licensed from SAP. Certain financial components became operational at
year end 1998, with other operational management systems to follow later in
1999. The new system will be implemented in all subsidiaries and allows for
expansion in a consistent and controlled manner.
Disclosure regarding the impact of year 2000 is included in the section
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of the Annual Report under the caption "Year 2000 Disclosure."
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CLIENTS
The Company has provided services to most of the major pharmaceutical
companies in the world. The Company believes that concentration of business
among certain large clients is not uncommon in the contract research
organization (CRO) industry. The Company has experienced such concentration in
the past and may experience such concentration in the future. Although AAI
strives to reduce its reliance on a limited number of major clients, there can
be no assurance that the Company's business will not be dependent upon certain
major clients, the loss of which could have a material adverse effect on the
Company. In addition, due to the project nature of the Company's business, there
can be no assurance that significant clients in any one period will continue to
be significant clients in other periods.
MARKETING AND BUSINESS DEVELOPMENT
Since its inception, the Company has taken a customer-focused approach in
marketing its services, often placing the Company's technical personnel with its
clients' development teams to participate in planning meetings for the
development of a product. The Company assigns sales and technical personnel as
contacts for its larger clients, understanding that technical personnel may be
better able to identify the full scope of the client's needs and suggest
innovative approaches before the client formally develops the parameters of an
anticipated project. Generally, the Company also hosts more than ten technical
seminars per year for the pharmaceutical and biotechnology industries addressing
a variety of formulation development issues, stability testing and other topics.
CONTRACTUAL ARRANGEMENTS
The Company's fee-for-service contracts are typically evidenced by signed
service estimates establishing an estimated fee for identified services. During
the Company's performance of a project, clients often adjust the scope of
services to be provided by the Company in light of interim project results, at
which time the amount of fees is adjusted accordingly.
Generally, the Company's fee-for-service contracts are terminable by the
client upon notice of 30 days or less, although certain major formulation
development and manufacturing agreements are not unilaterally terminable by the
client. Although the contracts typically permit payment of certain fees for
winding down a project, the loss of a large contract or the loss of multiple
contracts could adversely affect the Company's future revenue and profitability.
Contracts may be terminated for a variety of reasons, including the client's
decision to forego a particular study, the failure of product prototypes to
satisfy safety requirements and unexpected or undesired results of product
testing.
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BACKLOG
Backlog consists of anticipated net sales from signed service estimates
and other fee-for-service contracts that have not been completed and provide for
a readily ascertainable price. Once contracted work begins, net sales are
recognized as the service is performed. In certain cases, the Company begins
work for a client before a contract is signed. Accordingly, backlog does not
include anticipated net sales for which the Company has begun work but for which
the Company does not have a signed service estimate, or for any variable-priced
contracts. In addition, during the course of a project the client may
substantially adjust the requested scope of services and corresponding
adjustments are made to the price of services under the contract.
The Company believes that its backlog as of any date is not a meaningful
predictor of future results because backlog can be affected by a number of
factors, including variable size and duration of contracts and adjustments in
the scope of a contracted project as interim results become available.
Additionally, contracts generally are subject to termination by clients upon 30
days notice or less. Moreover, the scope of a contract can change over the
course of a project. At December 31, 1998 and 1997 backlog was approximately
$23.9 and $31.5 million, respectively.
COMPETITION
The Company competes primarily with in-house research, development,
quality control and other support service departments of pharmaceutical and
biotechnology companies, as well as university research laboratories. In
addition, the Company believes that although there are numerous competitors in
its industry, there are few competitors that offer the broad array of services
that it provides. Certain of the Company's competitors may have significantly
greater resources than the Company. Competitive conditions for service areas
vary.
Competitive factors include reliability, turn-around time, reputation for
innovative and quality science, capacity to perform numerous required services,
financial viability and price. The Company believes that it competes favorably
in these areas.
GOVERNMENT REGULATION
The services performed by the Company are subject to various regulatory
requirements designed to ensure the quality and integrity of pharmaceutical
products, primarily under the Federal Food, Drug, and Cosmetic Act and
associated GMP regulations which are administered by the United States Food and
Drug Administration (FDA) in accordance with current industry standards.
Services being performed outside the United States or for products intended to
be substituted to non-U.S. jurisdictions may be subject to additional regulatory
requirements and government agencies applicable to that jurisdiction. U.S.
regulations apply to all phases of drug manufacture, testing and record keeping,
including personnel, facilities, equipment, control of materials, processes and
laboratories, packaging, labelling and distribution. Noncompliance with such
regulations by the Company in a project could result in disqualification of data
collected by the Company for such project. Material violation of regulatory
requirements could result in additional regulatory sanctions. In severe cases
violations could result in a mandated closing of the Company's facilities which
would materially and adversely affect the Company's business.
<PAGE> 13
To help assure compliance with applicable regulations, the Company has
established quality assurance controls at its facilities that monitor ongoing
compliance by auditing test data and regularly inspecting facilities, procedures
and other regulatory compliance parameters. In addition, FDA regulations and
guidelines, as well as applicable international standards, serve as a basis for
the Company's standard operating procedures. Certain of the Company's
development and testing activities are subject to the Controlled Substances Act,
administered by the Drug Enforcement Agency (the "DEA"), which regulates
strictly all narcotic and habit-forming substances. The Company maintains
separate, restricted-access facilities and heightened control procedures for
projects involving such substances due to the level of security and other
controls required by the DEA.
The Company's activities involve the controlled use of hazardous
materials and chemicals. The Company is subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products and is insured against losses arising out
of the normal course of business operations. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by federal, state and local laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result which could materially and adversely
affect the financial condition of the Company.
EMPLOYEES
At December 31, 1998, the Company had approximately 1,000 full-time
equivalent employees, of which approximately 73 hold Ph.D. or M.D. degrees, or
the foreign equivalent. The Company believes that its relations with its
employees are good. None of the Company's employees in the U.S. are represented
by a union. German and French law provide certain representative rights to
employees.
The Company's performance depends on its ability to attract and retain
qualified professional, scientific and technical staff. The level of competition
among employers for such skilled personnel is high. The Company believes that
its employee benefit plans enhance employee morale, professional commitment and
work productivity and provide an incentive for employees to remain with the
Company. In addition, the Company operates an employee day-care and after-school
program facility at its Wilmington, North Carolina campus as a benefit to its
employees. While the Company has not experienced any significant problems in
attracting or retaining qualified staff, there can be no assurance that the
Company will be able to avoid these problems in the future.
All employees enter into confidentiality agreements protecting the
Company's proprietary information, as well as client-confidential material. New
U.S.-based employees are generally required to sign non-competition agreements,
prohibiting the employee from engaging in activities in competition with the
Company for a period of one year after termination of employment.
SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the name, age, principal occupation and
business experience for the executive officers of the Company.
<PAGE> 14
Frederick D. Sancilio, Ph.D., 49, Chairman of the Board, President, Chief
Executive Officer and Director. Dr. Sancilio has served in his current capacity
for more than five years. Before founding the Company in 1979 Dr. Sancilio's
experience in the pharmaceutical industry included various positions with
Burroughs-Wellcome Co., Schering-Plough Corporation, and Hoffmann-LaRoche, Inc.
He has published more than 30 scientific articles discussing various aspects of
pharmaceutical chemistry and regularly makes scientific presentations at
pharmaceutical seminars and meetings worldwide.
Eugene T. Haley, 49, Executive Vice President and Chief Financial Officer. Mr.
Haley has served as Executive Vice President and Chief Financial Officer since
February 1998. Prior to joining the Company he served as the Chief Financial
Officer of Kodak Worldwide Consumer Imaging Services during 1997 and as Senior
Vice President of Qualex, Inc. (an Eastman-Kodak subsidiary) from 1993 to 1997.
Frances M. Sakers, 41, Executive Vice President and Chief Operating Officer. Ms.
Sakers has served in her current position since September 1997. Prior to joining
the Company, Ms. Sakers was Executive Director of Quality Control at Novartis
Pharmaceuticals U.S. and has held various positions in pharmaceutical operations
at CIBA-Geigy Corporation for 14 years.
Joachim Rexhaus, 45, Executive Vice President, European Operations. Mr. Rexhaus
was elected an Executive Vive President in 1998 and has served the Company since
August 1997 in a number of financial and administrative management positions in
Europe. Prior to joining the Company, Mr. Rexhaus held a number of financial and
administrative management positions, most recently at Hoechst AG, Syntax and
IBM.
William J. Blank, 48, Executive Vice President, Marketing and Sales. Mr. Blank
has served as Executive Vice President, Marketing and Sales since January 1999.
Prior to joining the Company, he served as Vice President of Client Relations at
Parexel International Corp. and has held various sales and marketing positions
in the healthcare services industry.
William H. Underwood, 51, Executive Vice President and Director. Mr. Underwood
has served in his current position since 1992 and has been a Director since
1996. He also served as Chief Operating Officer from 1995 to May 1997. He has
held various positions in the pharmaceutical and cosmetic industries, prior to
joining the Company in 1986, with Mary Kay Cosmetics, Inc. and
Burroughs-Wellcome Co.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Wilmington,
North Carolina, in a 22,000-square foot leased facility. The Company's primary
U.S. facilities are located in Wilmington, North Carolina; Research Triangle
Park, North Carolina; New Brunswick, New Jersey; Natick, Massachusetts; and
Shawnee, Kansas constituting approximately 278,000 square feet of total
operational and administrative space. The Company's primary European facilities
are located in Neu-Ulm, Germany and include approximately 120,000 square feet of
operational and administrative space. This facility is leased under renewable
leases expiring in 2001. The Company maintains other operating units at leased
facilities in San Bruno, California; Munich, Germany; Paris, France; and
Arnheim, Netherlands. The Company maintains sales offices in Chicago, Illinois;
Boston, Massachusetts; San Diego and San Francisco, California; Copenhagen,
Denmark; London, England; Milan, Italy and Tokyo, Japan. The Company also has
joint operations with Shangai Second Medical University located in Shangai,
China and Tonji University in Wuhan, China. The Company believes that its
facilities are adequate for the Company's operations and that suitable
additional space will be available when needed.
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS.
The Company may be party to lawsuits and administrative proceedings
incidental to the normal course of its business which are not considered
material. Management does not believe that any liabilities related to such
lawsuits or proceedings will have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market and other related information required by Item 5 is included in
the section titled "Financial Results by Quarter" of the Annual Report and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is included in the section titled
"Selected Financial Data" of the Annual Report and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by Item 7 is included in the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Annual Report and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, as a result of global operating activities, is exposed to
risks associated with changes in foreign exchange rates. As foreign exchange
rates change, the U. S. Dollar equivalent of revenues and expensed denominated
in foreign currencies change and can have an adverse impact on the Company's
operating results. To seek to minimize its risk from foreign exchange movement,
the Company uses local debt to fund its foreign operations. If foreign exchange
rates were to change 10%, operating results would have changed by $60,000 in
1998.
The Company is also exposed to changes in interest rates on its
variable rate debt instruments. If interest rates were to change 1%, based on
year end debt amounts subject to variable interest rates, annual interest
expense on variable rate debt would change $40,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included in the "Consolidated
Statements of Income, Consolidated Balance Sheets, Consolidated Statements of
Cash Flows, Consolidated Statement of Stockholders' Equity and Notes to
Consolidated Financial Statements", of the Annual Report and is incorporated
herein by reference.
<PAGE> 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On April 30, 1998, the Audit Committee and Board of Directors dismissed
PricewaterhouseCoopers LLP (formerly Price Waterhouse LLP) as its independent
public accountants. The reports of Price Waterhouse on the consolidated
financial statements of the Company for the years ended December 31, 1997 and
1996 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertaintity, audit scope or accounting principle.
This event was reported in detail in a Form 8-K filed on April 30, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors of the Company and their business experience are set
forth on page 2 of the Company's Notice of Annual Meeting of Stockholders, dated
approximately April 9, 1999 (the "Proxy Statement") and are incorporated herein
by reference. The discussion of executive officers of the Company is included in
Part I under "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
A description of the compensation of the Company's executive officers
is set forth on pages 5 through 8 of the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
A description of the security ownership of certain beneficial owners
and management is set forth on pages 3 and 4 of the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain relationships and related transactions with management are
described on pages 9 and 10 of the Proxy Statement and in Items 11 and 12, and
are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
EXHIBITS:
A list of the exhibits required to be filed as part of this Report on
Form 10-K is set forth in the "Exhibit Index", which immediately precedes such
exhibits, and is incorporated herein by reference.
<PAGE> 17
FINANCIAL STATEMENT SCHEDULES:
The consolidated balance sheet as of December 31, 1998, and
related consolidated statements of income, cash flows and stockholders' equity
for the year ended December 31, 1998 and related notes to financial statements,
together with the report of independent auditors thereon of Ernst & Young LLP,
dated February 12, 1999, except Note 11, as to which the date is March 16, 1999;
and the consolidated balance sheet as of December 31, 1997, and related
consolidated statements of income, cash flows and stockholders' equity for each
of the two years in the period ended December 31, 1997 and related notes to
financial statements, together with the report of independent accountants
thereon of Price Waterhouse LLP, dated March 18, 1998, appearing in the Annual
Report, are incorporated herein by reference. With the exception of the
aforementioned information and the information incorporated by reference in
Items 1, and 5 through 8, the Annual Report is not to be deemed filed as part of
this report. The additional financial data listed below should be read in
conjunction with the financial statements in the Annual Report. Schedules not
included with this additional financial data have been omitted because they are
not applicable or the required information is shown in the financial statements
or notes thereto.
REPORTS ON FORM 8-K:
The Company has recently filed the following Form 8-Ks:
Dated February 16, 1999, to file a press release reporting the
Company's agreement to merge with Medical and Technical Research Associates,
Inc.
Dated March 2, 1999, to file a press release reporting the Company's
audited consolidated financial results for the year ended December 31, 1998.
ADDITIONAL FINANCIAL DATA
Page
----
Applied Analytical Industries, Inc., for years ended December 31,
1998, 1997 and 1996:
Report of Ernst & Young LLP, Independent Auditors F-1
Report of PricewaterhouseCoopers LLP, Independent
Accountants F-2
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-3
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
/s/ FREDERICK D. SANCILIO Chairman of the Board, March 31, 1999
- -------------------------------- President and Chief Executive
Frederick D. Sancilio, Ph.D. Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, or in their behalf by their duly
appointed attorney-in-fact, on behalf of the Registrant in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ FREDERICK D. SANCILIO Chairman of the Board, March 31, 1999
- ------------------------------------- President, Chief Executive
Frederick D. Sancilio, Ph.D. Officer and Director
(Principal Executive Officer)
/s/ EUGENE T. HALEY Executive Vice President March 31, 1999
- ------------------------------------- and Chief Financial Officer
Eugene T. Haley
/s/ GEORGE W. BECKWITH Controller (Principal March 31, 1999
- ------------------------------------- Accounting Officer)
George W. Beckwith
/s/ WILLIAM H. UNDERWOOD Executive Vice President March 31, 1999
- ------------------------------------- and Director
William H. Underwood
/s/ JOSEPH H. GLEBERMAN Director March 31, 1999
- -------------------------------------
Joseph H. Gleberman
/s/ JOHN M. RYAN Director March 31, 1999
- -------------------------------------
John M. Ryan
/s/ JAMES L. WATERS Director March 31, 1999
- -------------------------------------
James L. Waters
/s/ JAMES G. MARTIN Director March 31, 1999
- -------------------------------------
James G. Martin, PhD.
</TABLE>
<PAGE> 19
Report of Independent Auditors
We have audited the consolidated financial statements of Applied Analytical
Industries, Inc. and subsidiaries as of December 31, 1998, and for the year
ended December 31, 1998, and have issued our report thereon dated February 12,
1999 (except for Note 11, as to which the date is March 16, 1999), (included
elsewhere in this Annual Report on Form 10-K). Our audit also included the
financial statement schedule listed in Item 14 of this Annual Report on Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 12, 1999
F-1
<PAGE> 20
To the Board of Directors
of Applied Analytical Industries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 18, 1998 appearing in the 1998 Annual Report to Shareholders of
Applied Analytical Industries, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14 of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Raleigh, North Carolina
March 18, 1998
F-2
<PAGE> 21
SCHEDULE II
APPLIED ANALYTICAL INDUSTRIES, INC.
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Charged to
Balance at Charged to other Balance at
beginning costs and accounts Deductions end of
Description of period expenses - describe - describe period
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1996 $ 70 4 1 (1) $ 73
1997 $ 73 36 - (1) $109
1998 $109 290 48 (2) 7 (1) $440
</TABLE>
(1) Represents amounts written off as uncollectible accounts receivable. (2)
Represents allowance on accounts assumed in acquisition.
F-3
<PAGE> 22
APPLIED ANALYTICAL INDUSTRIES, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3.1 - Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
3.2 - Restated By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (Registration No. 333-5535))
4.1 - Articles Fourth, Seventh, Eleventh and Twelfth of the form
of Amended and Restated Certificate of Incorporation of the
Company (included in Exhibit 3.1)
4.2 - Article II of the form of Restated By-laws of the Company
(included in Exhibit 3.2)
4.3 - Specimen Certificate for shares of Common Stock, $.001 par
value, of the Company (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))
10.1 - Employment Agreement dated November 17, 1995 between the
Company and Frederick D. Sancilio (incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-5535))
10.2 - Applied Analytical Industries, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.3 - Applied Analytical Industries, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.4 - Applied Analytical Industries, Inc. 1997 Stock Option Plan,
as amended on May 8, 1998, (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998)
10.5 - Stockholder Agreement dated as of November 17, 1995 among the
Company, GS Capital Partners II, L.P., GS Capital Partners II
Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone
Street Fund 1995, L.P., Bridge Street Fund 1995, L.P.,
Noro-Moseley Partners III, L.P., Wakefield Group Limited
Partnership, James L. Waters, Frederick D. Sancilio and the
parties listed on Schedule 1 thereto (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-5535))
<PAGE> 23
10.6 - Lease Agreement dated as of March 7, 1994 between 5051 New
Centre Drive, L.L.C., as landlord, and the Company, as tenant
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No.
333-5535))
10.7 - Development Agreement dated as of April 25, 1994 between the
Company and Endeavor Pharmaceuticals Inc. (formerly, GenerEst,
Inc.) (incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (Registration No.
333-5535))
10.8 - Development Agreement dated as of April 4, 1995 between the
Company and Aesgen, Inc. (incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form S-1
(Registration No. 333-5535))
10.9 - Loan Agreement dated as of December 30, 1996 between
NationsBank, N.A. and the Company (incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996)
10.10 - Amendment No. 1, dated as of February 13, 1998, to the Loan
Agreement dated as of December 30, 1996 between NationsBank,
N.A. and the Company, (incorporated by reference to exhibit
10.10 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998)
10.11 - Underwriting Agreement dated September 19, 1996 between the
Company and Goldman Sachs & Co., Cowen & Company and Lehman
Brothers, Inc., as representatives of the underwriters listed
on Schedule 1 thereto (incorporated by reference to Exhibit
10.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
10.12 - Partnership Agreement dated as of October 2, 1998 between the
Company, First Security Bank, N. A. and the Various Banks and
Other Lending Institutions Which are Parties Hereto from time
to time, as the Holders and as the Lenders and NationsBank, N.
A.
10.13 - Security Agreement dated as of October 2, 1998 between First
Security Bank, N. A., and NationsBank, N. A.
13 - Portions of the 1998 Annual Report to Shareholders
21 - Subsidiaries of Applied Analytical Industries, Inc.
23.1 - Consent of Ernst & Young LLP
23.2 - Consent of PricewaterhouseCoopers LLP
27 - Financial Data Schedule (for SEC use only)
<PAGE> 1
EXHIBIT 10.12
- --------------------------------------------------------------------------------
PARTICIPATION AGREEMENT
Dated as of October 2, 1998
among
APPLIED ANALYTICAL INDUSTRIES, INC.,
as the Construction Agent and as the Lessee,
FIRST SECURITY BANK, NATIONAL ASSOCIATION,
not individually, except as expressly
stated herein, but solely as the Owner Trustee
under the AAI Realty Trust 1998-1,
THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES
HERETO FROM TIME TO TIME, as the Holders,
THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES
HERETO FROM TIME TO TIME, as the Lenders,
and
NATIONSBANK, N.A.,
as the Agent for the Lenders
and respecting the Security Documents,
as the Agent for the Lenders and the Holders,
to the extent of their interests
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
[SECTION 1A. INITIAL LENDER AND INITIAL HOLDER...................................................................1
SECTION 1. THE LOANS.............................................................................................1
SECTION 2. HOLDER ADVANCES.......................................................................................2
SECTION 3. SUMMARY OF TRANSACTIONS...............................................................................2
3.1. Operative Agreements................................................................................2
3.2. Property Purchase...................................................................................2
3.3. Construction of Improvements; Commencement of Basic Rent............................................3
SECTION 4. THE CLOSINGS..........................................................................................3
4.1. Initial Closing Date................................................................................3
4.2. Initial Closing Date; Property Closing Dates; Acquisition Advances; Construction Advances...........3
SECTION 5. FUNDING OF ADVANCES; CONDITIONS PRECEDENT; REPORTING REQUIREMENTS ON COMPLETION DATE;
THE LESSEE'S DELIVERY OF NOTICES; RESTRICTIONS ON LIENS...........................................................3
5.1. General.............................................................................................3
5.2. Procedures for Funding..............................................................................4
5.3. Conditions Precedent for the Lessor, the Agent, the Lenders and the Holders
Relating to the Initial Closing Date and the Advance of Funds for the
Acquisition of a Property................................................................................6
5.4. Conditions Precedent for the Lessor, the Agent, the Lenders and the Holders Relating to the
Advance of Funds after the Acquisition Advance..........................................................11
5.5. Additional Reporting and Delivery Requirements on Completion Date and on Construction
Period Termination Date.................................................................................12
5.6. The Construction Agent Delivery of Construction Budget Modifications...............................13
5.7. Restrictions on Liens..............................................................................13
5.8. Payments...........................................................................................14
5.9. Payment of Bridge Financing - Initial Closing Date.................................................14
SECTION 6. REPRESENTATIONS AND WARRANTIES.......................................................................14
6.1. Representations and Warranties of the Borrower.....................................................14
6.2. Representations and Warranties of the Construction Agent and the Lessee............................17
SECTION 7. PAYMENT OF CERTAIN EXPENSES...........................................................................22
7.1. Transaction Expenses...............................................................................22
7.2. Brokers' Fees......................................................................................23
7.3. Certain Fees and Expenses..........................................................................23
7.4. Unused Fee.........................................................................................23
SECTION 8. OTHER COVENANTS AND AGREEMENTS.......................................................................24
8.1. Cooperation with the Construction Agent or the Lessee..............................................24
8.2. Covenants of the Owner Trustee and the Holders.....................................................24
8.3. The Lessee Covenants, Consent and Acknowledgment...................................................26
8.4. Sharing of Certain Payments........................................................................29
8.5. Grant of Easements, etc............................................................................29
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
8.6. Appointment by the Agent, the Lenders, the Holders and the Owner Trustee...........................30
8.7. Collection and Allocation of Payments and Other Amounts............................................30
8.8. Release of Properties, etc.........................................................................34
SECTION 9. CREDIT AGREEMENT AND TRUST AGREEMENT.................................................................34
9.1. The Construction Agent's and the Lessee's Credit Agreement Rights..................................34
9.2. The Construction Agent's and the Lessee's Trust Agreement Rights...................................35
SECTION 10. TRANSFER OF INTEREST................................................................................35
10.1. Restrictions on Transfer..........................................................................35
10.2. Effect of Transfer................................................................................36
SECTION 11. INDEMNIFICATION.....................................................................................36
11.1. General Indemnity.................................................................................36
11.2. General Tax Indemnity.............................................................................39
11.3. Increased Costs, Illegality, etc..................................................................43
11.4. Funding/Contribution Indemnity....................................................................45
11.5. EXPRESS INDEMNIFICATION FOR ORDINARY NEGLIGENCE, STRICT LIABILITY, ETC...........................46
11.6. Additional Provisions Regarding Environmental Indemnification.....................................46
11.7. Additional Provisions Regarding Indemnification...................................................46
11.8. Indemnifications Provided by the Owner Trustee in Favor of the Other Indemnified Persons..........47
SECTION 12. MISCELLANEOUS.......................................................................................48
12.1. Survival of Agreements............................................................................48
12.2. Notices...........................................................................................48
12.3. Counterparts......................................................................................49
12.4. Terminations, Amendments, Waivers, Etc.; Unanimous Vote Matters...................................50
12.5. Headings, etc.....................................................................................51
12.6. Parties in Interest...............................................................................51
12.7. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; VENUE; ARBITRATION...............52
12.8. Severability......................................................................................54
12.9. Liability Limited.................................................................................54
12.10. Rights of the Lessee.............................................................................55
12.11. Further Assurances...............................................................................55
12.12. Calculations under Operative Agreements..........................................................56
12.13. Confidentiality..................................................................................56
12.14. Financial Reporting/Tax Characterization.........................................................56
12.15. Set-off..........................................................................................56
</TABLE>
[SCHEDULES
EXHIBITS
A - Form of Requisition - Sections 4.2, 5.2, 5.3 and 5.4
ii
<PAGE> 4
B - Form of Outside Counsel Opinion for the Lessee - Section 5.3(j)
C - Form of Officer's Certificate - Section 5.3(z)
D - Form of Secretary's Certificate - Section 5.3(aa)
E - Form of Officer's Certificate - Section 5.3(bb)
F - Form of Secretary's Certificate - Section 5.3(cc)
G - Form of Outside Counsel Opinion for the Owner Trustee - Section 5.3(dd)
H - Form of Outside Counsel Opinion for the Lessee - Section 5.3(ee)
I - Form of Officer's Certificate - Section 5.5
J - Description of Material Litigation - Section 6.2(d)
Appendix A - Rules of Usage and Definitions
iii
<PAGE> 5
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT dated as of October 2, 1998 (as amended,
modified, extended, supplemented, restated and/or replaced from time to time,
this "Agreement") is by and among APPLIED ANALYTICAL INDUSTRIES, INC., a
Delaware corporation (the "Lessee" or the "Construction Agent"); FIRST SECURITY
BANK, NATIONAL ASSOCIATION, a national banking association, not individually (in
its individual capacity, the "Trust Company"), except as expressly stated
herein, but solely as the Owner Trustee under the AAI Realty Trust 1998-1 (the
"Owner Trustee", the "Borrower" or the "Lessor"); the various banks and other
lending institutions which are parties hereto from time to time as holders of
certificates issued with respect to the AAI Realty Trust 1998-1 (subject to the
definition of Holders in Appendix A hereto, individually, a "Holder" and
collectively, the "Holders"); the various banks and other lending institutions
which are parties hereto from time to time as lenders (subject to the definition
of Lenders in Appendix A hereto, individually, a "Lender" and collectively, the
"Lenders"); and NationsBank, N.A., a national banking association, as the agent
for the Lenders and respecting the Security Documents, as the agent for the
Lenders and the Holders, to the extent of their interests (in such capacity, the
"Agent"). Capitalized terms used but not otherwise defined in this Agreement
shall have the meanings set forth in Appendix A hereto.
In consideration of the mutual agreements herein contained and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto hereby agree as follows:
SECTION 1A. INITIAL LENDER AND INITIAL HOLDER.
Notwithstanding the various references in the Operative Agreements to
multiple Lenders and multiple Holders, NationsBank, N.A. is the only Lender and
the only Holder as of the date of this Agreement. Additional Lenders and
additional Holders may become parties to the Operative Agreements subsequent to
the date hereof pursuant to the assignment provisions set forth in the
applicable Operative Agreements.
SECTION 1. THE LOANS.
Subject to the terms and conditions of this Agreement and the other
Operative Agreements and in reliance on the representations and warranties of
each of the parties hereto contained herein or made pursuant hereto, the Lenders
have agreed to make Loans to the Lessor from time to time in an aggregate
principal amount of up to the aggregate amount of the Commitments of the Lenders
in order for the Lessor to acquire the Properties and certain Improvements, to
develop and construct certain Improvements in accordance with the Agency
Agreement and the terms and provisions hereof and for the other purposes
described herein, and in consideration of the receipt of proceeds of the Loans,
the Lessor will issue the Notes. The Loans shall be made and the Notes shall be
issued pursuant to the Credit Agreement. Pursuant to
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Section 5 of this Agreement and Section 2 of the Credit Agreement, the Loans
will be made to the Lessor from time to time at the request of the Construction
Agent in consideration for the Construction Agent agreeing for the benefit of
the Lessor, pursuant to the Agency Agreement, to acquire the Properties, to
acquire the Equipment, to construct certain Improvements and to cause the Lessee
to lease the Properties, each in accordance with the Agency Agreement and the
other Operative Agreements. The Loans and the obligations of the Lessor under
the Credit Agreement shall be secured by the Collateral.
SECTION 2. HOLDER ADVANCES.
Subject to the terms and conditions of this Agreement and the other
Operative Agreements and in reliance on the representations and warranties of
each of the parties hereto contained herein or made pursuant hereto, on each
date Advances are requested to be made in accordance with Section 5 hereof, each
Holder shall make a Holder Advance on a pro rata basis to the Lessor with
respect to the AAI Realty Trust 1998-1 based on its Holder Commitment in an
amount in immediately available funds such that the aggregate of all Holder
Advances on such date shall be three percent (3%) of the amount of the Requested
Funds on such date; provided, that no Holder shall be obligated for any Holder
Advance in excess of its pro rata share of the Available Holder Commitment. The
aggregate amount of Holder Advances shall be up to the aggregate amount of the
Holder Commitments. No prepayment or any other payment with respect to any
Advance shall be permitted such that the Holder Advance with respect to such
Advance is less than three percent (3%) of the outstanding amount of such
Advance, except in connection with termination or expiration of the Term or in
connection with the exercise of remedies relating to the occurrence of a Lease
Event of Default. The representations, warranties, covenants and agreements of
the Holders herein and in the other Operative Agreements are several, and not
joint or joint and several.
SECTION 3. SUMMARY OF TRANSACTIONS.
3.1. OPERATIVE AGREEMENTS.
On the date hereof, each of the respective parties hereto and thereto
shall execute and deliver this Agreement, the Lease, each applicable Ground
Lease, the Agency Agreement, the Credit Agreement, the Notes, the Trust
Agreement, the Certificates, the Security Agreement, each applicable Mortgage
Instrument and such other documents, instruments, certificates and opinions of
counsel as agreed to by the parties hereto.
3.2. PROPERTY PURCHASE.
On each Property Closing Date and subject to the terms and conditions
of this Agreement (a) the Holders will each make a Holder Advance in accordance
with Sections 2 and 5 of this Agreement and the terms and provisions of the
Trust Agreement, (b) the Lenders will each make Loans in accordance with
Sections 1 and 5 of this Agreement and the terms and provisions of the Credit
Agreement, (c) the Lessor will purchase and acquire good and marketable title to
or ground lease pursuant to a Ground Lease, the applicable Property, each to be
within an Approved
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State, identified by the Construction Agent, in each case pursuant to a Deed,
Bill of Sale or Ground Lease, as the case may be, and grant the Agent a lien on
such Property by execution of the required Security Documents, (d) the Agent,
the Lessee and the Lessor shall execute and deliver a Lease Supplement relating
to such Property and (e) the Basic Term shall commence with respect to such
Property.
3.3. CONSTRUCTION OF IMPROVEMENTS; COMMENCEMENT OF BASIC RENT.
Construction Advances will be made with respect to particular
Improvements to be constructed and with respect to ongoing Work regarding the
Equipment and construction of particular Improvements, in each case, pursuant to
the terms and conditions of this Agreement and the Agency Agreement. The
Construction Agent will act as a construction agent on behalf of the Lessor
respecting the Work regarding the Equipment, the construction of such
Improvements and the expenditures of the Construction Advances related to the
foregoing. The Construction Agent shall promptly notify the Lessor upon
Completion of the Improvements and the Lessee shall commence to pay Basic Rent
as of the Rent Commencement Date.
SECTION 4. THE CLOSINGS.
4.1. INITIAL CLOSING DATE.
All documents and instruments required to be delivered on the Initial
Closing Date shall be delivered at the offices of Moore & Van Allen, PLLC,
Charlotte, North Carolina, or at such other location as may be determined by the
Lessor, the Agent and the Lessee.
4.2. INITIAL CLOSING DATE; PROPERTY CLOSING DATES; ACQUISITION
ADVANCES; CONSTRUCTION ADVANCES.
The Construction Agent shall deliver to the Agent a requisition (a
"Requisition"), in the form attached hereto as Exhibit A or in such other form
as is satisfactory to the Agent, in its reasonable discretion, in connection
with (a) the Transaction Expenses and other fees, expenses and disbursements
payable, pursuant to Section 7.1, by the Lessor and (b) each Acquisition Advance
pursuant to Section 5.3 and (c) each Construction Advance pursuant to Section
5.4.
SECTION 5. FUNDING OF ADVANCES; CONDITIONS PRECEDENT;
REPORTING REQUIREMENTS ON COMPLETION DATE;
THE LESSEE'S DELIVERY OF NOTICES; RESTRICTIONS ON LIENS.
5.1. GENERAL.
(a) To the extent funds have been advanced to the Lessor as
Loans by the Lenders and to the Lessor as Holder Advances by the
Holders, the Lessor will use such funds from time to time in accordance
with the terms and conditions of this Agreement and the other Operative
Agreements (i) at the direction of the Construction Agent to acquire
the Properties in accordance with the terms of this Agreement, the
Agency
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Agreement and the other Operative Agreements, (ii) to make Advances to
the Construction Agent to permit the acquisition, testing, engineering,
installation, development, construction, modification, design, and
renovation, as applicable, of the Properties (or components thereof) in
accordance with the terms of the Agency Agreement and the other
Operative Agreements, and (iii) to pay Transaction Expenses, fees,
expenses and other disbursements payable by the Lessor under Sections
7.1(a) and 7.1(b).
(b) In lieu of the payment of interest on the Loans and Holder
Yield on the Holder Advances on any Scheduled Interest Payment Date
with respect to any Property during the period prior to the Rent
Commencement Date with respect to such Property, (i) each Lender's Loan
shall automatically be increased by the amount of interest accrued and
unpaid on such Loan for such period (except to the extent that at any
time such increase would cause such Lender's Loan to exceed such
Lender's Available Commitment, in which case the Lessee shall pay such
excess amount to such Lender in immediately available funds on the date
such Lender's Available Commitment was exceeded), and (ii) each
Holder's Holder Advance shall automatically be increased by the amount
of Holder Yield accrued and unpaid on such Holder Advance for such
period (except to the extent that at any time such increase would cause
the Holder Advance of such Holder to exceed such Holder's Available
Holder Commitment, in which case the Lessee shall pay such excess
amount to such Holder in immediately available funds on the date the
Available Holder Commitment of such Holder was exceeded). Such
increases in a Lender's Loan and a Holder's Holder Advance shall occur
without any disbursement of funds by any Person.
5.2. PROCEDURES FOR FUNDING.
(a) The Construction Agent shall designate the date for
Advances hereunder in accordance with the terms and provisions hereof;
provided, however, it is understood and agreed that no more than two
(2) Advances (excluding any conversion and/or continuation of any Loan
or Holder Advance) may be requested during any calendar month. Not less
than (i) three (3) Business Days prior to the date that the first
Advance is requested hereunder and (ii) three (3) Business Days prior
to the date on which any subsequent Acquisition Advance or Construction
Advance is to be made, the Construction Agent shall deliver to the
Agent, (A) with respect to the date that the first Advance is requested
hereunder and each subsequent Acquisition Advance, a Requisition as
described in Section 4.2 hereof (including without limitation a legal
description of the Land, if any, a schedule of the Improvements, if
any, and a schedule of the Equipment, if any, acquired or to be
acquired on such date, and a schedule of the Work, if any, to be
performed, each of the foregoing in a form reasonably acceptable to the
Agent) and (B) with respect to each Construction Advance, a Requisition
identifying (among other things) the Property to which such
Construction Advance relates.
(b) Each Requisition shall: (i) be irrevocable, (ii) request
funds in an amount that is not in excess of the total aggregate of the
Available Commitments plus the
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Available Holder Commitments at such time, and (iii) request that the
Holders make Holder Advances and that the Lenders make Loans to the
Lessor for the payment of Transaction Expenses, Property Acquisition
Costs (in the case of an Acquisition Advance) or other Property Costs
(in the case of a Construction Advance) that have previously been
incurred or are to be incurred on the date of such Advance to the
extent such were not subject to a prior Requisition, in each case as
specified in the Requisition.
(c) Subject to the satisfaction of the conditions precedent
set forth in Sections 5.3 or 5.4, as applicable, on each Property
Closing Date or the date on which the Construction Advance is to be
made, as applicable, (i) the Lenders shall make Loans based on their
respective Lender Commitments to the Lessor in an aggregate amount
equal to ninety-seven percent (97%) of the Requested Funds specified in
any Requisition plus any additional amount of Transaction Expenses as
referenced in Sections 7.1(a) and 7.1(b) and any additional amount
respecting any indemnity payment as referenced in Section 11.9 (ratably
between the Tranche A Lenders and the Tranche B Lenders with the
Tranche A Lenders funding eighty-eight percent (88%) of the Requested
Funds and the Tranche B Lenders funding nine percent (9%) of the
Requested Funds), unless any such funding of Transaction Expenses or
any indemnity payment is declined in writing by each Lender and each
Holder (such decision to be in the sole discretion of each Lender and
each Holder), up to an aggregate principal amount equal to the
aggregate of the Available Commitments, (ii) the Holders shall make
Holder Advances based on their respective Holder Commitments in an
aggregate amount equal to three percent (3%) of the balance of the
Requested Funds specified in such Requisition, plus any additional
amount of Transaction Expenses as referenced in Sections 7.1(a) and
7.1(b) and any additional amount respecting any indemnity payment as
referenced in Section 11.9, unless any such funding of Transaction
Expenses or any indemnity payment is declined in writing by each Lender
and each Holder (such decision to be in the sole discretion of each
Lender and each Holder) up to the aggregate advanced amount equal to
the aggregate of the Available Holder Commitments; and (iii) the total
amount of such Loans and Holder Advances made on such date shall (x) be
used by the Lessor to pay Property Costs and/or Transaction Expenses
within three (3) Business Days of the receipt by the Lessor of such
Advance or (y) be advanced by the Lessor on the date of such Advance to
the Construction Agent or the Lessee to pay Property Costs, as
applicable. Notwithstanding that the Operative Agreements state that
Advances shall be directed to the Lessor, each Advance shall in fact be
directed to the Agent (for the benefit of the Lessor) and applied by
the Agent (for the benefit of the Lessor) pursuant to the requirements
imposed on the Lessor under the Operative Agreements.
(d) With respect to an Advance obtained by the Lessor to pay
for Property Costs and/or Transaction Expenses or other costs payable
under Section 7.1 hereof and not expended by the Lessor for such
purpose on the date of such Advance, such amounts shall be held by the
Lessor (or the Agent on behalf of the Lessor) until the applicable
closing date or, if such closing date does not occur within three (3)
Business Days of the date of the Lessor's receipt of such Advance,
shall be applied regarding the applicable Advance to repay the Lenders
and the Holders and, subject to the terms hereof, and of the
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Credit Agreement and the Trust Agreement, shall remain available for
future Advances. Any such amounts held by the Lessor (or the Agent on
behalf of the Lessor) shall be subject to the lien of the Security
Agreement.
(e) All Operative Agreements which are to be delivered to the
Lessor, the Agent, the Lenders or the Holders shall be delivered to the
Agent, on behalf of the Lessor, the Agent, the Lenders or the Holders,
and such items (except for Notes, Certificates, Bills of Sale, the
Ground Leases and chattel paper originals, with respect to which in
each case there shall be only one original) shall be delivered with
originals sufficient for the Lessor, the Agent, each Lender and each
Holder. All other items which are to be delivered to the Lessor, the
Agent, the Lenders or the Holders shall be delivered to the Agent, on
behalf of the Lessor, the Agent, the Lenders or the Holders, and such
other items shall be held by the Agent. To the extent any such other
items are requested in writing from time to time by the Lessor, any
Lender or any Holder, the Agent shall provide a copy of such item to
the party requesting it.
(f) Notwithstanding the completion of any closing under this
Agreement pursuant to Sections 5.3 or 5.4, each condition precedent in
connection with any such closing may be subsequently enforced by the
Agent (unless such has been expressly waived in writing by the Agent).
5.3. CONDITIONS PRECEDENT FOR THE LESSOR, THE AGENT, THE LENDERS
AND THE HOLDERS RELATING TO THE INITIAL CLOSING DATE AND THE
ADVANCE OF FUNDS FOR THE ACQUISITION OF A PROPERTY.
The obligations (i) on the Initial Closing Date of the Lessor, the
Agent, the Lenders and the Holders to enter into the transactions contemplated
by this Agreement, including without limitation the obligation to execute and
deliver the applicable Operative Agreements to which each is a party on the
Initial Closing Date, (ii) on the Initial Closing Date of the Holders to make
Holder Advances, and of the Lenders to make Loans in order to pay Transaction
Expenses, fees, expenses and other disbursements payable by the Lessor under
Section 7.1(a) of this Agreement and (iii) on a Property Closing Date for the
purpose of providing funds to the Lessor necessary to pay the Transaction
Expenses, fees, expenses and other disbursements payable by the Lessor under
Section 7.1(b) of this Agreement and to acquire or ground lease a Property (an
"Acquisition Advance"), in each case (with regard to the foregoing Sections
5.3(i), (ii) and (iii)) are subject to the satisfaction or waiver of the
following conditions precedent on or prior to the Initial Closing Date or the
applicable Property Closing Date, as the case may be (to the extent such
conditions precedent require the delivery of any agreement, certificate,
instrument, memorandum, legal or other opinion, appraisal, commitment, title
insurance commitment, lien report or any other document of any kind or type,
such shall be in form and substance satisfactory to the Agent, in its reasonable
discretion; notwithstanding the foregoing, the obligations of each party shall
not be subject to any conditions contained in this Section 5.3 which are
required to be performed by such party):
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(a) the correctness of the representations and warranties of
the parties to this Agreement contained herein, in each of the other
Operative Agreements and each certificate delivered pursuant to any
Operative Agreement (including without limitation the Incorporated
Representations and Warranties) on each such date;
(b) the performance by the parties to this Agreement of their
respective agreements contained herein and in the other Operative
Agreements to be performed by them on or prior to each such date;
(c) the Agent shall have received a fully executed counterpart
copy of the Requisition, appropriately completed;
(d) title to each such Property shall conform to the
representations and warranties set forth in Section 6.2(l) hereof;
(e) the Construction Agent shall have delivered to the Agent a
good standing certificate for the Construction Agent in the state where
each such Property is located, the Deed with respect to the Land and
existing Improvements (if any), a copy of the Ground Lease (if any),
and a copy of the Bill of Sale with respect to the Equipment (if any),
respecting such of the foregoing as are being acquired or ground leased
on each such date with the proceeds of the Loans and Holder Advances or
which have been previously acquired or ground leased with the proceeds
of the Loans and Holder Advances and such Land, existing Improvements
(if any) and Equipment (if any) shall be located in an Approved State;
(f) there shall not have occurred and be continuing any
Default or Event of Default under any of the Operative Agreements and
no Default or Event of Default under any of the Operative Agreements
will have occurred after giving effect to the Advance requested by each
such Requisition;
(g) the Construction Agent shall have delivered to the Agent
title insurance commitments to issue policies respecting each such
Property in favor of the Lessor and the Agent from a title insurance
company acceptable to the Agent, with such title exceptions thereto as
are acceptable to the Agent;
(h) the Construction Agent shall have delivered to the Agent
an environmental site assessment respecting each such Property prepared
by an independent recognized professional acceptable to the Agent;
(i) the Construction Agent shall have delivered to the Agent a
survey (with a flood hazard certification) respecting each such
Property prepared by an independent recognized professional acceptable
to the Agent;
(j) unless such an opinion has previously been delivered with
respect to a particular state, the Construction Agent shall have caused
to be delivered to the Agent a
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legal opinion in the form attached hereto as Exhibit B or in such other
form as is acceptable to the Agent with respect to local law real
property issues respecting the state in which each such Property is
located addressed to the Lessor, the Agent, the Lenders and the
Holders, from counsel located in the state where each such Property is
located, prepared by counsel acceptable to the Agent and a separate
flood hazard certificate respecting each such Property prepared by an
independent recognized professional acceptable to the Agent;
(k) the Agent shall be satisfied that the acquisition, ground
leasing and/or holding of each such Property and the execution of the
Mortgage Instrument and the other Security Documents will not
materially and adversely affect the rights of the Lessor, the Agent,
the Holders or the Lenders under or with respect to the Operative
Agreements;
(l) the Construction Agent shall have delivered to the Agent
invoices for, or other reasonably satisfactory evidence of, the various
Transaction Expenses and other fees, expenses and disbursements
referenced in Sections 7.1(a) or 7.1(b) of this Agreement, as
appropriate;
(m) the Construction Agent shall have caused to be delivered
to the Agent a Mortgage Instrument (in such form as is acceptable to
the Agent, with revisions as necessary to conform to applicable state
law), Lessor Financing Statements and Lender Financing Statements
respecting each such Property, all fully executed and in recordable
form;
(n) the Lessee shall have delivered to the Agent with respect
to each such Property a Lease Supplement and a memorandum (or short
form lease) regarding the Lease and such Lease Supplement (such
memorandum or short form lease to be in the form attached to the Lease
as Exhibit B or in such other form as is acceptable to the Agent, with
modifications as necessary to conform to applicable state law, and in
form suitable for recording);
(o) with respect to each Acquisition Advance, the sum of the
Available Commitment plus the Available Holder Commitment (after
deducting the Unfunded Amount, if any, and after giving effect to the
Acquisition Advance) will be sufficient to pay all amounts payable
therefrom;
(p) if any such Property is subject to a Ground Lease, the
Construction Agent shall have caused a lease memorandum (or short form
lease) to be delivered to the Agent for such Ground Lease and, if
requested by the Agent, a landlord waiver and a mortgagee waiver (in
each case, in such form as is acceptable to the Agent);
(q) counsel (acceptable to the Agent) for the ground lessor of
each such Property subject to a Ground Lease shall have issued to the
Lessor, the Agent, the Lenders and the Holders, its opinion;
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(r) the Construction Agent shall have delivered to the Agent a
preliminary Construction Budget for each such Property, if applicable;
(s) the Construction Agent shall have provided evidence to the
Agent of insurance with respect to each such Property as provided in
the Lease;
(t) the Construction Agent shall have caused an Appraisal
regarding each such Property (in an amount equal to at least one
hundred (100%) of the Property Cost (as reasonably estimated by the
Construction Agent) for such Property as of the Completion Date) to be
provided to the Agent from an appraiser selected by the Agent;
(u) the Construction Agent shall cause (i) Uniform Commercial
Code lien searches, tax lien searches and judgment lien searches
regarding the Lessee to be conducted (and copies thereof to be
delivered to the Agent) in such jurisdictions as determined by the
Agent by a nationally recognized search company acceptable to the Agent
and (ii) the liens referenced in such lien searches which are
objectionable to the Agent to be either removed or otherwise handled in
a manner satisfactory to the Agent;
(v) all taxes, fees and other charges in connection with the
execution, delivery, recording, filing and registration of the
Operative Agreements and/or documents related thereto shall have been
paid or provisions for such payment shall have been made to the
satisfaction of the Agent;
(w) in the opinion of the Agent and its respective counsel,
the transactions contemplated by the Operative Agreements do not and
will not subject the Lessor, the Lenders, the Agent or the Holders to
any adverse regulatory prohibitions, constraints, penalties or fines;
(x) each of the Operative Agreements to be entered into on
such date shall have been duly authorized, executed and delivered by
the parties thereto, and shall be in full force and effect, and the
Agent shall have received a fully executed copy of each of the
Operative Agreements;
(y) since the date of the most recent audited financial
statements (as delivered pursuant to the requirements of the Lessee
Credit Agreement) of the Lessee, there shall not have occurred any
event, condition or state of facts which shall have or could reasonably
be expected to have a Material Adverse Effect, other than as
specifically contemplated by the Operative Agreements;
(z) as of the Initial Closing Date only, the Agent shall have
received an Officer's Certificate, dated as of the Initial Closing
Date, of the Lessee in the form attached hereto as Exhibit C or in such
other form as is acceptable to the Agent stating that (i) each and
every representation and warranty of the Lessee contained in the
Operative Agreements to which it is a party is true and correct on and
as of the Initial Closing Date; (ii) no Default or Event of Default has
occurred and is continuing under
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any Operative Agreement; (iii) each Operative Agreement to which the
Lessee is a party is in full force and effect with respect to it; and
(iv) the Lessee has duly performed and complied with all covenants,
agreements and conditions contained herein or in any Operative
Agreement required to be performed or complied with by it on or prior
to the Initial Closing Date;
(aa) as of the Initial Closing Date only, the Agent shall have
received (i) a certificate of the Secretary or an Assistant Secretary
of the Lessee, dated as of the Initial Closing Date, in the form
attached hereto as Exhibit D or in such other form as is acceptable to
the Agent attaching and certifying as to (1) the resolutions of its
Board of Directors duly authorizing the execution, delivery and
performance by the Lessee of each of the Operative Agreements to which
it is or will be a party, (2) its articles of incorporation certified
as of a recent date by the Secretary of State of its state of
incorporation and its by-laws and (3) the incumbency and signature of
persons authorized to execute and deliver on its behalf the Operative
Agreements to which it is or will be a party and (ii) a good standing
certificate (or local equivalent) from the appropriate office of the
respective states where the Lessee is incorporated and where the
principal place of business of the Lessee is located as to its good
standing in each such state. To the extent the Lessee is a partnership,
a limited liability company or is otherwise organized, such Person
shall deliver to the Agent (in form and substance satisfactory to the
Agent) as of the Initial Closing Date (A) a certificate regarding such
Person and any corporate general partners covering the matters
described in Exhibit D and (B) a good standing certificate, a
certificate of limited partnership or a local equivalent of either of
the foregoing, as applicable;
(bb) as of the Initial Closing Date only, the Agent shall have
received an Officer's Certificate of the Lessor dated as of the Initial
Closing Date in the form attached hereto as Exhibit E or in such other
form as is acceptable to the Agent, stating that (i) each and every
representation and warranty of the Lessor contained in the Operative
Agreements to which it is a party is true and correct on and as of the
Initial Closing Date, (ii) each Operative Agreement to which the Lessor
is a party is in full force and effect with respect to it and (iii) the
Lessor has duly performed and complied with all covenants, agreements
and conditions contained herein or in any Operative Agreement required
to be performed or complied with by it on or prior to the Initial
Closing Date;
(cc) as of the Initial Closing Date only, the Agent shall have
received (i) a certificate of the Secretary, an Assistant Secretary,
Trust Officer or Vice President of the Trust Company in the form
attached hereto as Exhibit F or in such other form as is acceptable to
the Agent, attaching and certifying as to (A) the signing resolutions
duly authorizing the execution, delivery and performance by the Lessor
of each of the Operative Agreements to which it is or will be a party,
(B) its articles of association or other equivalent charter documents
and its by-laws, as the case may be, certified as of a recent date by
an appropriate officer of the Trust Company and (C) the incumbency and
signature of persons authorized to execute and deliver on its behalf
the Operative
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Agreements to which it is a party and (ii) a good standing certificate
from the Office of the Comptroller of the Currency;
(dd) as of the Initial Closing Date only, counsel for the
Lessor acceptable to the Agent shall have issued to the Lessee, the
Holders, the Lenders and the Agent its opinion in the form attached
hereto as Exhibit G or in such other form as is reasonably acceptable
to the Agent; and
(ee) as of the Initial Closing Date only, the Construction
Agent shall have caused to be delivered to the Agent a legal opinion in
the form attached hereto as Exhibit H or in such other form as is
acceptable to the Agent, addressed to the Lessor, the Agent, the
Lenders and the Holders, from counsel acceptable to the Agent.
5.4. CONDITIONS PRECEDENT FOR THE LESSOR, THE AGENT, THE LENDERS
AND THE HOLDERS RELATING TO THE ADVANCE OF FUNDS AFTER THE
ACQUISITION ADVANCE.
The obligations of the Holders to make Holder Advances, and the Lenders
to make Loans in connection with all requests for Advances subsequent to the
acquisition of a Property (and to pay the Transaction Expenses, fees, expenses
and other disbursements payable by the Lessor under Section 7.1 of this
Agreement in connection therewith) are subject to the satisfaction or waiver of
the following conditions precedent (to the extent such conditions precedent
require the delivery of any agreement, certificate, instrument, memorandum,
legal or other opinion, appraisal, commitment, title insurance commitment, lien
report or any other document of any kind or type, such shall be in form and
substance satisfactory to the Agent, in its reasonable discretion;
notwithstanding the foregoing, the obligations of each party shall not be
subject to any conditions contained in this Section 5.4 which are required to be
performed by such party):
(a) the correctness on such date of the representations and
warranties of the parties to this Agreement contained herein, in each
of the other Operative Agreements and in each certificate delivered
pursuant to any Operative Agreement (including without limitation the
Incorporated Representations and Warranties);
(b) the performance by the parties to this Agreement of their
respective agreements contained herein and in the other Operative
Agreements to be performed by them on or prior to each such date;
(c) the Agent shall have received a fully executed counterpart
of the Requisition, appropriately completed;
(d) based upon the applicable Construction Budget which shall
satisfy the requirements of this Agreement, the Available Commitments
and the Available Holder Commitment (after deducting the Unfunded
Amount) will be sufficient to complete the Improvements;
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(e) there shall not have occurred and be continuing any
Default or Event of Default under any of the Operative Agreements and
no Default or Event of Default under any of the Operative Agreements
will have occurred after giving effect to the Construction Advance
requested by the applicable Requisition;
(f) the title insurance policy delivered in connection with
the requirements of Section 5.3(g) shall provide for (or shall be
endorsed to provide for) insurance in an amount at least equal to the
maximum total Property Cost indicated by the Construction Budget
referred to in subparagraph (d) above and there shall be no title
change or exception objectionable to the Agent;
(g) the Construction Agent shall have delivered to the Agent
copies of the Plans and Specifications for the applicable Improvements;
(h) the Construction Agent shall have delivered to the Agent
invoices for, or other reasonably satisfactory evidence of, any
Transaction Expenses and other fees, expenses and disbursements
referenced in Section 7.1(b) that are to be paid with the Advance;
(i) the Construction Agent shall have delivered, or caused to
be delivered to the Agent, invoices, Bills of Sale or other documents
acceptable to the Agent, in each case with regard to any Equipment or
other components of such Property then being acquired with the proceeds
of the Loans and Holder Advances and naming the Lessor as purchaser and
transferee;
(j) all taxes, fees and other charges in connection with the
execution, delivery, recording, filing and registration of the
Operative Agreements shall have been paid or provisions for such
payment shall have been made to the satisfaction of the Agent;
(k) since the date of the most recent audited Financial
Statements (as such term is defined in the Lessee Credit Agreement) of
the Lessee, there shall not have occurred any event, condition or state
of facts which shall have or could reasonably be expected to have a
Material Adverse Effect, other than as specifically contemplated by the
Operative Agreements; and
(l) in the opinion of the Agent and its counsel, the
transactions contemplated by the Operative Agreements do not and will
not subject the Lessor, the Lenders, the Agent or the Holders to any
adverse regulatory prohibitions, constraints, penalties or fines.
5.5. ADDITIONAL REPORTING AND DELIVERY REQUIREMENTS ON COMPLETION
DATE AND ON CONSTRUCTION PERIOD TERMINATION DATE.
On or prior to the Completion Date for each Property, the Construction
Agent shall deliver to the Agent an Officer's Certificate in the form attached
hereto as Exhibit I or in such
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other form as is acceptable to the Agent specifying (a) the address for such
Property, (b) the Completion Date for such Property, (c) the aggregate Property
Cost for such Property, (d) detailed, itemized documentation supporting the
asserted Property Cost figures and (e) that all representations and warranties
of the Construction Agent and Lessee in each of the Operative Agreements and
each certificate delivered pursuant thereto (including without limitation the
Incorporated Representations and Warranties) are true and correct as of the
Completion Date. The Agent shall have the right to contest the information
contained in such Officer's Certificate. Furthermore, on or prior to the
Completion Date for each Property, the Construction Agent shall deliver or cause
to be delivered to the Agent (unless previously delivered to the Agent)
originals of the following, each of which shall be in form and substance
acceptable to the Agent, in its reasonable discretion: (w) a title insurance
endorsement regarding the title insurance policy delivered in connection with
the requirements of Section 5.3(g), but only to the extent such endorsement is
necessary to provide for insurance in an amount at least equal to the maximum
total Property Cost and, if endorsed, the endorsement shall not include a title
change or exception objectionable to the Agent; (x) an as-built survey for such
Property, (y) insurance certificates respecting such Property as required
hereunder and under the Lease Agreement, and (z) if requested by the Agent,
amendments to the Lessor Financing Statements executed by the appropriate
parties. In addition, on the Completion Date for such Property the Construction
Agent covenants and agrees that the recording fees, documentary stamp taxes or
similar amounts required to be paid in connection with the related Mortgage
Instrument shall be paid in an amount required by applicable law, subject,
however, to the obligations of the Lenders and the Holders to fund such costs to
the extent required pursuant to Section 7.1.
5.6. THE CONSTRUCTION AGENT DELIVERY OF CONSTRUCTION BUDGET
MODIFICATIONS.
The Construction Agent covenants and agrees to deliver to the Agent
each month notification of any modification to any Construction Budget regarding
any Property if such modification increases the cost to construct such Property;
provided no Construction Budget may be increased unless (a) the title insurance
policies referenced in Section 5.3(g) are also modified or endorsed, if
necessary, to provide for insurance in an amount that satisfies the requirements
of Section 5.4(f) of this Agreement and (b) after giving effect to any such
amendment, the Construction Budget remains in compliance with the requirements
of Section 5.4(d) of this Agreement.
5.7. RESTRICTIONS ON LIENS.
On each Property Closing Date, the Construction Agent shall cause each
Property acquired by the Lessor on such date to be free and clear of all Liens
except those referenced in Sections 6.2(r)(i) and 6.2(r)(ii). On each date a
Property is either sold to a third party in accordance with the terms of the
Operative Agreements or, pursuant to Section 22.1(a) of the Lease Agreement,
retained by the Lessor, the Lessee shall cause such Property to be free and
clear of all Liens (other than Lessor Liens and such other Liens that are
expressly set forth as title exceptions on the title commitment issued under
Section 5.3(g) with respect to such Property, to the extent such title
commitment has been approved by the Agent).
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5.8. PAYMENTS.
All payments of principal, interest, Holder Advances, Holder Yield and
other amounts to be made by the Construction Agent or the Lessee under this
Agreement or any other Operative Agreements (excluding Excepted Payments which
shall be paid directly to the party to whom such payments are owed) shall be
made to the Agent at the office designated by the Agent from time to time in
Dollars and in immediately available funds, without setoff, deduction, or
counterclaim. Subject to the definition of "Interest Period" in Appendix A
attached hereto, whenever any payment under this Agreement or any other
Operative Agreements shall be stated to be due on a day that is not a Business
Day, such payment may be made on the next succeeding Business Day, and such
extension of time in such case shall be included in the computation of interest,
Holder Yield and fees payable pursuant to the Operative Agreements, as
applicable and as the case may be.
5.9. PAYMENT OF BRIDGE FINANCING - INITIAL CLOSING DATE.
The Lessee shall cause the bridge financing evidenced by the Promissory
Note dated May 29, 1998 in the original principal amount of $2,000,000 executed
by the Owner Trustee in favor of NationsBank, N.A. (including without limitation
all principal, interest and other amounts then due and owing) to be paid in full
on or prior to the Initial Closing Date.
SECTION 6. REPRESENTATIONS AND WARRANTIES.
6.1. REPRESENTATIONS AND WARRANTIES OF THE BORROWER.
Effective as of the Initial Closing Date and the date of each Advance,
the Trust Company in its individual capacity and as the Borrower, as indicated,
represents and warrants to each of the other parties hereto as follows,
provided, that the representations in the following paragraphs (h), (j) and (k)
are made solely in its capacity as the Borrower:
(a) It is a national banking association and is duly organized
and validly existing and in good standing under the laws of the United
States of America and has the power and authority to enter into and
perform its obligations under the Trust Agreement and (assuming due
authorization, execution and delivery of the Trust Agreement by the
Holders) has the corporate and trust power and authority to act as the
Owner Trustee and to enter into and perform the obligations under each
of the other Operative Agreements to which the Trust Company or the
Owner Trustee, as the case may be, is or will be a party and each other
agreement, instrument and document to be executed and delivered by it
on or before such Closing Date in connection with or as contemplated by
each such Operative Agreement to which the Trust Company or the Owner
Trustee, as the case may be, is or will be a party;
(b) The execution, delivery and performance of each Operative
Agreement to which it is or will be a party, either in its individual
capacity or (assuming due authorization, execution and delivery of the
Trust Agreement by the Holders) as the
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Owner Trustee, as the case may be, has been duly authorized by all
necessary action on its part and neither the execution and delivery
thereof, nor the consummation of the transactions contemplated thereby,
nor compliance by it with any of the terms and provisions thereof (i)
does or will require any approval or consent of any trustee or holders
of any of its indebtedness or obligations, (ii) does or will contravene
any Legal Requirement relating to its banking or trust powers, (iii)
does or will contravene or result in any breach of or constitute any
default under, or result in the creation of any Lien upon any of its
property under, (A) its charter or by-laws, or (B) any indenture,
mortgage, chattel mortgage, deed of trust, conditional sales contract,
bank loan or credit agreement or other agreement or instrument to which
it is a party or by which it or its properties may be bound or
affected, which contravention, breach, default or Lien under clause (B)
would materially and adversely affect its ability, in its individual
capacity or as the Owner Trustee, to perform its obligations under the
Operative Agreements to which it is a party or (iv) does or will
require any Governmental Action by any Governmental Authority
regulating its banking or trust powers;
(c) The Trust Agreement and, assuming the Trust Agreement is
the legal, valid and binding obligation of the Holders, each other
Operative Agreement to which the Trust Company or the Owner Trustee, as
the case may be, is or will be a party have been, or on or before such
Closing Date will be, duly executed and delivered by the Trust Company
or the Owner Trustee, as the case may be, and the Trust Agreement and
each such other Operative Agreement to which the Trust Company or the
Owner Trustee, as the case may be, is a party constitutes, or upon
execution and delivery will constitute, a legal, valid and binding
obligation enforceable against the Trust Company or the Owner Trustee,
as the case may be, in accordance with the terms thereof;
(d) There is no action or proceeding pending or, to its
knowledge, threatened to which it is or will be a party, either in its
individual capacity or as the Owner Trustee, before any Governmental
Authority that, if adversely determined, would materially and adversely
affect its ability, in its individual capacity or as the Owner Trustee,
to perform its obligations under the Operative Agreements to which it
is a party or would question the validity or enforceability of any of
the Operative Agreements to which it is or will become a party;
(e) It has not assigned or transferred any of its right, title
or interest in or under the Lease, the Agency Agreement or its interest
in any Property or any portion thereof, except in accordance with the
Operative Agreements;
(f) No Default of Event of Default under the Operative
Agreements attributable to it has occurred and is continuing;
(g) Except as otherwise contemplated in the Operative
Agreements, the proceeds of the Loans and Holder Advances shall not be
applied by the Owner Trustee for any purpose other than the purchase
and/or lease of the Properties, the acquisition, installation and
testing of the Equipment, the construction of Improvements and the
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payment of Transaction Expenses and the fees, expenses and other
disbursements referenced in Sections 7.1(a) and 7.1(b) of this
Agreement, in each case which accrue prior to the Rent Commencement
Date with respect to a particular Property;
(h) Neither the Owner Trustee nor any Person authorized by the
Owner Trustee to act on its behalf has offered or sold any interest in
the Trust Estate or the Notes, or in any similar security relating to a
Property, or in any security the offering of which for the purposes of
the Securities Act would be deemed to be part of the same offering as
the offering of the aforementioned securities to, or solicited any
offer to acquire any of the same from, any Person other than, in the
case of the Notes, the Agent, and neither the Owner Trustee nor any
Person authorized by the Owner Trustee to act on its behalf will take
any action which would subject, as a direct result of such action
alone, the issuance or sale of any interest in the Trust Estate or the
Notes to the provisions of Section 5 of the Securities Act or require
the qualification of any Operative Agreement under the Trust Indenture
Act of 1939, as amended;
(i) The Owner Trustee's principal place of business, chief
executive office and office where the documents, accounts and records
relating to the transactions contemplated by this Agreement and each
other Operative Agreement are kept are located at 79 South Main Street,
Salt Lake City, Utah 84111;
(j) The Owner Trustee is not engaged principally in, and does
not have as one (1) of its important activities, the business of
extending credit for the purpose of purchasing or carrying any margin
stock (within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System of the United States), and no part of the
proceeds of the Loans or the Holder Advances will be used by it to
purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any such margin stock or for any
purpose that violates, or is inconsistent with, the provisions of
Regulations G, T, U, or X of the Board of Governors of the Federal
Reserve System of the United States;
(k) The Owner Trustee is not an "investment company" or a
company controlled by an "investment company" within the meaning of the
Investment Company Act;
(l) Each Property is free and clear of all Lessor Liens
attributable to the Owner Trustee in its individual capacity; and
(m) The Owner Trustee, in its trust capacity, is a party to no
documents, instruments or agreements other than the Operative
Agreements to which it is a party and any other documents delivered by
the Owner Trustee in connection with the Operative Agreements.
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6.2. REPRESENTATIONS AND WARRANTIES OF THE CONSTRUCTION AGENT AND
THE LESSEE.
Effective as of the Initial Closing Date, the date of each Advance and
the Rent Commencement Date, the Construction Agent and the Lessee represent and
warrant to each of the other parties hereto that:
(a) The Incorporated Representations and Warranties are true
and correct (unless such relate solely to an earlier point in time) and
the Lessee has delivered to the Agent the financial statements and
other reports referred to in Section 6.01 of the Lessee Credit
Agreement;
(b) The execution and delivery by each of the Construction
Agent and the Lessee of this Agreement and the other applicable
Operative Agreements as of such date and the performance by each of the
Construction Agent and the Lessee of its respective obligations under
this Agreement and the other applicable Operative Agreements are within
the corporate, partnership or limited liability company (as the case
may be) powers of each of the Construction Agent and the Lessee, have
been duly authorized by all necessary corporate, partnership or limited
liability company (as the case may be) action on the part of each of
the Construction Agent and the Lessee (including without limitation any
necessary shareholder action), have been duly executed and delivered,
have received all necessary governmental approval, and do not and will
not (i) violate any Legal Requirement which is binding on the
Construction Agent, the Lessee or any of their Subsidiaries, (ii)
contravene or conflict with, or result in a breach of, any provision of
the Articles of Incorporation, By-Laws or other organizational
documents of any of the Construction Agent, the Lessee or any of their
Subsidiaries or of any agreement, indenture, instrument or other
document which is binding on any of the Construction Agent, the Lessee
or any of their Subsidiaries or (iii) result in, or require, the
creation or imposition of any Lien (other than pursuant to the terms of
the Operative Agreements) on any asset of any of the Construction
Agent, the Lessee or any of their Subsidiaries;
(c) This Agreement and the other applicable Operative
Agreements to which the Construction Agent or the Lessee are parties,
executed prior to and as of such date, constitute the legal, valid and
binding obligation of the Construction Agent or the Lessee, as
applicable, enforceable against the Construction Agent or the Lessee,
as applicable, in accordance with their terms. The Construction Agent
and the Lessee have each executed the various Operative Agreements
required to be executed as of such date;
(d) Except as described in Exhibit J, there are no material
actions, suits or proceedings pending or, to our knowledge, threatened
against either the Construction Agent or the Lessee in any court or
before any Governmental Authority (nor shall any order, judgment or
decree have been issued or proposed to be issued by any Governmental
Authority to set aside, restrain, enjoin or prevent the full
performance of any Operative Agreement or any transaction contemplated
thereby) that (i) concern any Property or the Lessee's interest
therein, (ii) question the validity or enforceability of any
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Operative Agreement or any transaction described in the Operative
Agreements or (iii) shall have or could reasonably be expected to have
a Material Adverse Effect;
(e) No Governmental Action by any Governmental Authority or
other authorization, registration, consent, approval, waiver, notice or
other action by, to or of any other Person pursuant to any Legal
Requirement, contract, indenture, instrument or agreement or for any
other reason is required to authorize or is required in connection with
(i) the execution, delivery or performance of any Operative Agreement,
(ii) the legality, validity, binding effect or enforceability of any
Operative Agreement, (iii) the acquisition, ownership, construction,
completion, occupancy, operation, leasing or subleasing of any Property
or (iv) any Advance, in each case, except those which have been
obtained and are in full force and effect;
(f) Upon the execution and delivery of each Lease Supplement
to the Lease, (i) the Lessee will have unconditionally accepted the
Property subject to the Lease Supplement and will have a valid and
subsisting leasehold interest in such Property, subject only to the
Permitted Liens, and (ii) no offset will exist with respect to any Rent
or other sums payable under the Lease;
(g) Except as otherwise contemplated by the Operative
Agreements, the Construction Agent shall not use the proceeds of any
Holder Advance or Loan for any purpose other than the purchase and/or
lease of the Properties, the acquisition, installation and testing of
the Equipment, the construction of Improvements and the payment of
Transaction Expenses and the fees, expenses and other disbursements
referenced in Sections 7.1(a) and 7.1(b) of this Agreement, in each
case which accrue prior to the Rent Commencement Date with respect to a
particular Property;
(h) All information heretofore or contemporaneously herewith
furnished by either the Construction Agent or the Lessee or any of
their Subsidiaries to the Agent, the Owner Trustee, any Lender or any
Holder for purposes of or in connection with this Agreement and the
transactions contemplated hereby is, and all information hereafter
furnished by or on behalf of the Construction Agent, the Lessee or any
of their Subsidiaries to the Agent, the Owner Trustee, any Lender or
any Holder pursuant hereto or in connection herewith will be, true and
accurate in every material respect on the date as of which such
information is dated or certified, and such information, taken as a
whole, does not and will not omit to state any material fact necessary
to make such information, taken as a whole, not misleading;
(i) The principal place of business, chief executive office
and office of the Construction Agent and the Lessee where the
documents, accounts and records relating to the transactions
contemplated by this Agreement and each other Operative Agreement are
kept are located at 5051 New Centre Drive, Wilmington, North Carolina
28403;
(j) The representations and warranties of the Construction
Agent and the Lessee set forth in any of the Operative Agreements are
true and correct in all material
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respects on and as of each such date as if made on and as of such date.
The Construction Agent and the Lessee are in all material respects in
compliance with their respective obligations under the Operative
Agreements and there exists no Default or Event of Default under any of
the Operative Agreements which is continuing and which has not been
cured within any cure period expressly granted under the terms of the
applicable Operative Agreement or otherwise waived in accordance with
the applicable Operative Agreement. No Default or Event of Default will
occur under any of the Operative Agreements as a result of, or after
giving effect to, the Advance requested by the Requisition on the date
of each Advance;
(k) As of each Property Closing Date, the date of each
subsequent Advance and the Rent Commencement Date only, each Property
then being financed consists of (i) unimproved Land or (ii) Land and
existing Improvements thereon which Improvements are either suitable
for occupancy at the time of acquisition or ground leasing or will be
renovated and/or modified in accordance with the terms of this
Agreement. Each Property then being financed is located at the location
set forth on the applicable Requisition, each of which is in one (1) of
the Approved States;
(l) As of each Property Closing Date, the date of each
subsequent Advance and the Rent Commencement Date only, the Lessor has
good and marketable fee simple title to each Property, or, if any
Property is the subject of a Ground Lease, the Lessor will have a valid
ground leasehold interest enforceable against the ground lessor of such
Property in accordance with the terms of such Ground Lease, subject
only to (i) such Liens referenced in Sections 6.2(r)(i) and 6.2(r)(ii)
on the applicable Property Closing Date and (ii) subject to Section
5.7, Permitted Liens after the applicable Property Closing Date;
(m) As of each Property Closing Date, the date of each
subsequent Advance and the Rent Commencement Date only, no portion of
any Property is located in an area identified as a special flood hazard
area by the Federal Emergency Management Agency or other applicable
agency, or if any such Property is located in an area identified as a
special flood hazard area by the Federal Emergency Management Agency or
other applicable agency, then flood insurance has been obtained for
such Property in accordance with Section 14.2(b) of the Lease and in
accordance with the National Flood Insurance Act of 1968, as amended;
(n) As of each Property Closing Date, the date of each
subsequent Advance and the Rent Commencement Date only, each Property
complies with all Insurance Requirements and all standards of Lessee
with respect to similar properties owned by Lessee;
(o) As of each Property Closing Date, the date of each
subsequent Advance and the Rent Commencement Date only, each Property
complies with all Legal Requirements as of such date (including without
limitation all zoning and land use laws and Environmental Laws), except
to the extent that failure to comply therewith,
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individually or in the aggregate, shall not have and could not
reasonably be expected to have a Material Adverse Effect;
(p) As of each Property Closing Date, the date of each
subsequent Advance and the Rent Commencement Date only, all utility
services and facilities necessary for the construction and operation of
the Improvements and the installation and operation of the Equipment
regarding each Property (including without limitation gas, electrical,
water and sewage services and facilities) are available at the
applicable Land or will be constructed prior to the Completion Date for
such Property;
(q) As of each Property Closing Date, the date of each
subsequent Advance and the Rent Commencement Date only, acquisition,
installation and testing of the Equipment (if any) and construction of
the Improvements (if any) to such date shall have been performed in a
good and workmanlike manner, substantially in accordance with the
applicable Plans and Specifications;
(r) (i) The Security Documents create, as security for the
Obligations (as such term is defined in the Security
Agreement), valid and enforceable security interests in, and
Liens on, all of the Collateral, in favor of the Agent, for
the ratable benefit of the Lenders and the Holders, as their
respective interests appear in the Operative Agreements, and
such security interests and Liens are subject to no other
Liens other than Liens that are expressly set forth as title
exceptions on the title commitment issued under Section 5.3(g)
with respect to the applicable Property, to the extent such
title commitment has been approved by the Agent. Upon
recordation of the Mortgage Instrument in the real estate
recording office in the applicable Approved State identified
by the Construction Agent or the Lessee, the Lien created by
the Mortgage Instrument in the real property described therein
shall be a perfected first priority mortgage Lien on such real
property in favor of the Agent, for the ratable benefit of the
Lenders and the Holders, as their respective interests appear
in the Operative Agreements. To the extent that the security
interests in the portion of the Collateral comprised of
personal property can be perfected by filing in the filing
offices in the applicable Approved States or elsewhere
identified by the Construction Agent or the Lessee, upon
filing of the Lender Financing Statements in such filing
offices, the security interests created by the Security
Agreement shall be perfected first priority security interests
in such personal property in favor of the Agent, for the
ratable benefit of the Lenders and the Holders, as their
respective interests appear in the Operative Agreements;
(ii) The Lease Agreement creates, as security for the
obligations of the Lessee under the Lease Agreement, valid and
enforceable security interests in, and Liens on, each Property
leased thereunder, in favor of the Lessor, and such security
interests and Liens are subject to no other Liens other than
Liens that are expressly set forth as title exceptions on the
title commitment issued under Section 5.3(g) with respect to
the applicable Property, to the extent such title commitment
has been approved by the Agent. Upon recordation of the
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memorandum of the Lease Agreement and the memorandum of a
Ground Lease (or, in either case, a short form lease) in the
real estate recording office in the applicable Approved State
identified by the Construction Agent or the Lessee, the Lien
created by the Lease Agreement in the real property described
therein shall be a perfected first priority mortgage Lien on
such real property in favor of the Agent, for the ratable
benefit of the Lenders and the Holders, as their respective
interests appear in the Operative Agreements. To the extent
that the security interests in the portion of any Property
comprised of personal property can be perfected by the filing
in the filing offices in the applicable Approved State or
elsewhere identified by the Construction Agent or the Lessee
upon filing of the Lessor Financing Statements in such filing
offices, a security interest created by the Lease Agreement
shall be perfected first priority security interests in such
personal property in favor of the Lessor, which rights
pursuant to the Lessor Financing Statements are assigned to
the Agent, for the ratable benefit of the Lenders and the
Holders, as their respective interests appear in the Operative
Agreements;
(s) The Plans and Specifications for each Property will be
prepared prior to the commencement of construction in accordance with
all applicable Legal Requirements (including without limitation all
applicable Environmental Laws and building, planning, zoning and fire
codes), except to the extent the failure to comply therewith,
individually or in the aggregate, shall not have and could not
reasonably be expected to have a Material Adverse Effect. Upon
completion of the Improvements for each Property in accordance with the
applicable Plans and Specifications, such Improvements will be within
any building restriction lines and will not encroach in any manner onto
any adjoining land (except as permitted by express written easements,
which have been approved by the Agent);
(t) As of the Rent Commencement Date only, each Property shall
be improved in accordance with the applicable Plans and Specifications
in a good and workmanlike manner and shall be operational;
(u) As of each Property Closing Date only, each Property has
been acquired or ground leased pursuant to a Ground Lease at a price
that is not in excess of fair market value or fair market rental value,
as the case may be; and
(v) The Lessee has (i) initiated a review and assessment of
all areas within its and each of its Subsidiaries' business and
operations (including those affected by suppliers, vendors and
customers of the Lessee and its Subsidiaries) that could be adversely
affected by the Year 2000 Problem, (ii) developed a plan for addressing
the Year 2000 Problem on a timely basis and (iii) to date, implemented
that plan in accordance with that timetable. Based on the foregoing,
the Lessee believes that all computer applications (including those of
suppliers, vendors and customers of the Lessee and its Subsidiaries)
that are material to its or any of its Subsidiaries' business and
operations are reasonably expected on a timely basis to be able to
perform properly date-
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sensitive functions for all dates before and after January 1, 2000
(that is, be "Year 2000 Compliant"), except to the extent that a
failure to do so shall not have and could not reasonably be expected to
have a Material Adverse Effect.
SECTION 7. PAYMENT OF CERTAIN EXPENSES.
7.1. TRANSACTION EXPENSES.
(a) The Lessor agrees on the Initial Closing Date, to pay, or
cause to be paid, all Transaction Expenses arising from the Initial
Closing Date, including without limitation all reasonable fees,
expenses and disbursements of the various legal counsels for the Lessor
and the Agent in connection with the transactions contemplated by the
Operative Agreements and incurred in connection with such Initial
Closing Date, the initial fees and expenses of the Owner Trustee due
and payable on such Initial Closing Date, all fees, taxes and expenses
for the recording, registration and filing of documents and all other
reasonable fees, expenses and disbursements incurred in connection with
such Initial Closing Date; provided, however, the Lessor shall pay such
amounts described in this Section 7.1(a) only if (i) such amounts are
properly described in a Requisition delivered on or before the Initial
Closing Date, and (ii) funds are made available by the Lenders and the
Holders in connection with such Requisition in an amount sufficient to
allow such payment. On the Initial Closing Date after delivery and
receipt of the Requisition referenced in Section 4.2(a) hereof and
satisfaction of the other conditions precedent for such date, the
Holders shall make Holder Advances and the Lenders shall make Loans to
the Lessor to pay for the Transaction Expenses, fees, expenses and
other disbursements referenced in this Section 7.1(a). The Lessee
agrees to timely pay all amounts referred to in this Section 7.1(a) to
the extent not paid by the Lessor.
(b) Assuming no Default or Event of Default shall have
occurred and be continuing and only for the period prior to the Rent
Commencement Date, the Lessor agrees on each Property Closing Date, on
the date of any Construction Advance and on the Completion Date to pay,
or cause to be paid, all Transaction Expenses including without
limitation all reasonable fees, expenses and disbursements of the
various legal counsels for the Lessor and the Agent in connection with
the transactions contemplated by the Operative Agreements and billed in
connection with such Advance or such Completion Date, all amounts
described in Section 7.1(a) of this Agreement which have not been
previously paid, the annual fees and reasonable out-of-pocket expenses
of the Owner Trustee, all fees, expenses and disbursements incurred
with respect to the various items referenced in Sections 5.3, 5.4
and/or 5.5 (including without limitation any premiums for title
insurance policies and charges for any updates to such policies) and
all other reasonable fees, expenses and disbursements in connection
with such Advance or such Completion Date including without limitation
all expenses relating to and all fees, taxes and expenses for the
recording, registration and filing of documents and during the
Commitment Period, all fees, expenses and costs referenced in Sections
7.3(a), 7.3(b),
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7.3(d) and 7.4; provided, however, the Lessor shall pay such amounts
described in this Section 7.1(b) only if (i) such amounts are properly
described in a Requisition delivered on the applicable date and (ii)
funds are made available by the Lenders and the Holders in connection
with such Requisition in an amount sufficient to allow such payment. On
each Property Closing Date, on the date of any Construction Advance or
any Completion Date, after delivery of the applicable Requisition and
satisfaction of the other conditions precedent for such date, the
Holders shall make a Holder Advance and the Lenders shall make Loans to
the Lessor to pay for the Transaction Expenses, fees, expenses and
other disbursements referenced in this Section 7.1(b). The Lessee
agrees to timely pay all amounts referred to in this Section 7.1(b) to
the extent not paid by the Lessor.
(c) All fees payable pursuant to the Operative Agreements
shall be calculated on the basis of a year of three hundred sixty (360)
days for the actual days elapsed.
7.2. BROKERS' FEES.
The Lessee agrees to pay or cause to be paid any and all brokers' fees,
if any, including without limitation any interest and penalties thereon, which
are payable in connection with the transactions contemplated by this Agreement
and the other Operative Agreements.
7.3. CERTAIN FEES AND EXPENSES.
The Lessee agrees to pay or cause to be paid (a) the initial and annual
Owner Trustee's fee and all reasonable expenses of the Owner Trustee and any
co-trustees (including without limitation reasonable counsel fees and expenses)
or any successor owner trustee and/or co-trustee, for acting as the owner
trustee under the Trust Agreement, (b) all reasonable costs and expenses
incurred by the Construction Agent, the Lessee, the Agent, the Lenders, the
Holders or the Lessor in entering into any Lease Supplement and any future
amendments, modifications, supplements, restatements and/or replacements with
respect to any of the Operative Agreements, whether or not such Lease
Supplement, amendments, modifications, supplements, restatements and/or
replacements are ultimately entered into, or giving or withholding of waivers of
consents hereto or thereto, which have been requested by the Construction Agent,
the Lessee, the Agent, the Lenders, the Holders or the Lessor, (c) all
reasonable costs and expenses incurred by the Construction Agent, the Lessee,
the Agent, the Lenders, the Holders or the Lessor in connection with any
exercise of remedies under any Operative Agreement or any purchase of any
Property by the Construction Agent, the Lessee or any third party and (d) all
reasonable costs and expenses incurred by the Construction Agent, the Lessee,
the Agent, the Lenders, the Holders or the Lessor in connection with any
transfer or conveyance of any Property, whether or not such transfer or
conveyance is ultimately accomplished.
7.4. UNUSED FEE.
During the Commitment Period, the Lessee agrees to pay or to cause to
be paid to the Agent for the account of (a) the Lenders, respectively, an unused
fee (the "Lender Unused Fee") equal to the product of the average daily
Available Commitment of each Lender during the
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Commitment Period multiplied by a rate of fifteen one-hundredths of one percent
(0.15%) per annum and (b) the Holders, respectively, an unused fee (the "Holder
Unused Fee") equal to the product of the average daily Available Holder
Commitment of each Holder during the Commitment Period multiplied by a rate of
fifteen one-hundredths of one percent (0.15%) per annum. Such Unused Fees
payable quarterly in arrears on each Unused Fee Payment Date. If all or a
portion of any such Unused Fee shall not be paid when due, such overdue amount
shall bear interest, payable by the Lessee on demand, at a rate per annum equal
to the ABR (or in the case of Holder Yield, the ABR plus the Applicable
Percentage for Eurodollar Holder Advances) plus two percent (2%) from the date
of such non-payment until such amount is paid in full (as well as before
judgment).
SECTION 8. OTHER COVENANTS AND AGREEMENTS.
8.1. COOPERATION WITH THE CONSTRUCTION AGENT OR THE LESSEE.
The Holders, the Lenders, the Lessor (at the direction of the Majority
Secured Parties) and the Agent shall, at the expense of and to the extent
reasonably requested by the Construction Agent or the Lessee (but without
assuming additional liabilities on account thereof and only to the extent such
is acceptable to the Holders, the Lenders, the Lessor (at the direction of the
Majority Secured Parties) and the Agent in their reasonable discretion),
cooperate with the Construction Agent or the Lessee in connection with the
Construction Agent or the Lessee satisfying its covenant obligations contained
in the Operative Agreements including without limitation at any time and from
time to time, promptly and duly executing and delivering any and all such
further instruments, documents and financing statements (and continuation
statements related thereto).
8.2. COVENANTS OF THE OWNER TRUSTEE AND THE HOLDERS.
Each of the Owner Trustee and the Holders hereby agrees that so long as
this Agreement is in effect:
(a) Neither the Owner Trustee (in its trust capacity or in its
individual capacity) nor any Holder will create or permit to exist at
any time, and each of them will, at its own cost and expense, promptly
take such action as may be necessary duly to discharge, or to cause to
be discharged, all Lessor Liens on the Properties attributable to it;
provided, however, that the Owner Trustee and the Holders shall not be
required to so discharge any such Lessor Lien while the same is being
contested in good faith by appropriate proceedings diligently
prosecuted so long as such proceedings shall not materially and
adversely affect the rights of the Lessee under the Lease and the other
Operative Agreements or involve any material danger of impairment of
the Liens of the Security Documents or of the sale, forfeiture or loss
of, and shall not interfere with the use or disposition of, any
Property or title thereto or any interest therein or the payment of
Rent;
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(b) Without prejudice to any right under the Trust Agreement
of the Owner Trustee to resign (subject to the requirement set forth in
the Trust Agreement that such resignation shall not be effective until
a successor shall have agreed to accept such appointment), or the
Holders' rights under the Trust Agreement to remove the institution
acting as the Owner Trustee (after consent to such removal by the Agent
as provided in the Trust Agreement), each of the Owner Trustee and the
Holders hereby agrees with the Lessee and the Agent (i) not to
terminate or revoke the trust created by the Trust Agreement except as
permitted by Article VIII of the Trust Agreement, (ii) not to amend,
supplement, terminate or revoke or otherwise modify any provision of
the Trust Agreement in such a manner as to adversely affect the rights
of any such party without the prior written consent of such party and
(iii) to comply with all of the terms of the Trust Agreement, the
nonperformance of which would adversely affect such party;
(c) The Owner Trustee or any successor may resign or be
removed by the Holders as the Owner Trustee, a successor Owner Trustee
may be appointed and a corporation may become the Owner Trustee under
the Trust Agreement, only in accordance with the provisions of Article
IX of the Trust Agreement and, with respect to such appointment, with
the consent of the Lessee (so long as there shall be no Lease Event of
Default that shall have occurred and be continuing), which consent
shall not be unreasonably withheld or delayed;
(d) The Owner Trustee, in its capacity as the Owner Trustee
under the Trust Agreement, and not in its individual capacity, shall
not contract for, create, incur or assume any Indebtedness (except that
the Owner Trustee may, at the request of Lessee and with the consent of
the Agent, enter into interest rate swap, exchange, cap, collar or
similar arrangements (including the Swap Agreement) with respect to
Loans and Holder Advances made hereunder and under the Credit Agreement
and the Trust Agreement, respectively), or enter into any business or
other activity or enter into any contracts or agreements, other than
pursuant to or under the Operative Agreements;
(e) The Holders will not instruct the Owner Trustee to take
any action in violation of the terms of any Operative Agreement;
(f) Neither any Holder nor the Owner Trustee shall (i)
commence any case, proceeding or other action with respect to the Owner
Trustee under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization,
arrangement, winding-up, liquidation, dissolution, composition or other
relief with respect to it or its debts, or (ii) seek appointment of a
receiver, trustee, custodian or other similar official with respect to
the Owner Trustee or for all or any substantial benefit of the
creditors of the Owner Trustee; and neither any Holder nor the Owner
Trustee shall take any action in furtherance of, or indicating its
consent to, approval of, or acquiescence in, any of the acts set forth
in this paragraph;
(g) The Owner Trustee shall give prompt notice to the Lessee,
the Holders and the Agent if the Owner Trustee's principal place of
business or chief executive office, or
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the office where the records concerning the accounts or contract rights
relating to any Property are kept, shall cease to be located at 79
South Main Street, Salt Lake City, Utah 84111, or if it shall change
its name; and
(h) The Owner Trustee shall take or refrain from taking such
actions and grant or refrain from granting such approvals with respect
to the Operative Agreements and/or relating to any Property in each
case as directed in writing by the Agent (until such time as the Loans
are paid in full, and then by the Majority Holders) or, in connection
with Sections 8.5 and 9.2 hereof, the Lessee; provided, however, that
notwithstanding the foregoing provisions of this subparagraph (h) the
Owner Trustee, the Agent, the Lenders and the Holders each acknowledge,
covenant and agree that neither the Owner Trustee nor the Agent shall
act or refrain from acting, regarding each Unanimous Vote Matter, until
such party has received the approval of each Lender and each Holder
affected by such matter.
8.3. THE LESSEE COVENANTS, CONSENT AND ACKNOWLEDGMENT.
(a) The Lessee acknowledges and agrees that the Owner Trustee,
pursuant to the terms and conditions of the Security Agreement and the
Mortgage Instruments, shall create Liens respecting the various
personal property, fixtures and real property described therein in
favor of the Agent. The Lessee hereby irrevocably consents to the
creation, perfection and maintenance of such Liens. Each of the
Construction Agent and the Lessee shall, to the extent reasonably
requested by any of the other parties hereto, cooperate with the other
parties in connection with their covenants herein or in the other
Operative Agreements and shall from time to time duly execute and
deliver any and all such future instruments, documents and financing
statements (and continuation statements related thereto) as any other
party hereto may reasonably request.
(b) The Lessor hereby instructs the Lessee, and the Lessee
hereby acknowledges and agrees, that until such time as the Loans and
the Holder Advances are paid in full and the Liens evidenced by the
Security Agreement and the Mortgage Instruments have been released (i)
any and all Rent (excluding Excepted Payments which shall be payable to
each Holder or other Person as appropriate) and any and all other
amounts of any kind or type under any of the Operative Agreements due
and owing or payable to any Person shall instead be paid directly to
the Agent (excluding Excepted Payments which shall be payable to each
Holder or other Person as appropriate) or as the Agent may direct from
time to time for allocation and distribution in accordance with the
procedures set forth in Section 8.7 hereof, (ii) all rights of the
Lessor under the Lease shall be exercised by the Agent and (iii) the
Lessee shall cause all notices, certificates, financial statements,
communications and other information which are delivered, or are
required to be delivered, to the Lessor, to also to be delivered at the
same time to the Agent.
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(c) The Lessee shall not consent to or permit any amendment,
supplement or other modification of the terms or provisions of any
Operative Agreement except in accordance with Section 12.4 of this
Agreement.
(d) The Lessee hereby covenants and agrees to cause an
Appraisal or reappraisal (in form and substance satisfactory to the
Agent and from an appraiser selected by the Agent) to be issued
respecting any Property as requested by the Agent from time to time (i)
at each and every time as such shall be required to satisfy any
regulatory requirements imposed on the Agent, the Lessor, the Trust
Company, any Lender and/or any Holder and (ii) after the occurrence of
an Event of Default.
(e) The Lessee hereby covenants and agrees that, except for
amounts payable as Basic Rent, any and all payment obligations owing
from time to time under the Operative Agreements by any Person to the
Agent, any Lender, any Holder or any other Person shall (without
further action) be deemed to be Supplemental Rent obligations payable
by the Lessee. Without limitation, such obligations of the Lessee shall
include the Supplement Rent obligations pursuant to Section 3.3 of the
Lease, arrangement fees, administrative fees, participation fees,
commitment fees, unused fees, prepayment penalties, breakage costs,
indemnities, trustee fees and transaction expenses incurred by the
parties hereto in connection with the transactions contemplated by the
Operative Agreements.
(f) At any time the Lessor or the Agent is entitled under the
Operative Agreements to possession of a Property or any component
thereof, each of the Construction Agent and the Lessee hereby covenants
and agrees, at its own cost and expense, to assemble and make the same
available to the Agent (on behalf of the Lessor).
(g) The Lessee hereby covenants and agrees that, respecting
each Property, Non-Integral Equipment financed under the Operative
Agreements may constitute up to, but shall not exceed, fifteen percent
(15%) of the aggregate Advances extended at or prior to such time with
respect to such Property.
(h) The Lessee hereby covenants and agrees that as of
Completion (i) the Property Cost for each individual parcel of the
Property shall be (A) no less than $2,000,000 and (B) no more than
$10,000,000 and (ii) each parcel of the Property shall be a Permitted
Facility.
(i) The Lessee hereby covenants and agrees that it shall give
prompt notice to the Agent if the Lessee's principal place of business
or chief executive office, or the office where the records concerning
the accounts or contract rights relating to any Property are kept,
shall cease to be located at 5051 New Centre Drive, Wilmington, North
Carolina 28403 or if it shall change its name.
(j) Unless the Agent otherwise agrees in writing, the Lessee
hereby covenants and agrees that the aggregate Property Cost of
Properties purchased for any reason by the
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Lessee prior to the Expiration Date shall not exceed ten percent (10%)
of the aggregate Property Cost for all Properties funded during the
Commitment Period.
(k) [INTENTIONALLY OMITTED].
(l) The Lessee hereby covenants and agrees that the rights of
the Lessee under this Agreement and the Lease shall not impair or in
any way diminish the obligations of the Construction Agent and/or the
rights of the Lessor under the Agency Agreement.
(m) The Lessee shall promptly notify the Agent, or cause the
Agent to be promptly notified, upon the Lessee gaining knowledge of the
occurrence of any Default or Event of Default which is continuing at
such time. In any event, such notice shall be provided to the Agent
within ten (10) days of when the Lessee gains such knowledge.
(n) Until all of the obligations under the Operative
Agreements have been finally and indefeasibly paid and satisfied in
full and the Commitments and the Holder Commitments terminated unless
consent has been obtained from the Majority Secured Parties, the Lessee
will:
(i) except as permitted by the express provisions of
the Lessee Credit Agreement, preserve and maintain its
separate legal existence and all rights, franchises, licenses
and privileges necessary to the conduct of its business, and
qualify and remain qualified as a foreign corporation (or
partnership, limited liability company or other such similar
entity, as the case may be) and authorized to do business in
each jurisdiction in which the failure to do so qualify would
have a Material Adverse Effect;
(ii) pay and perform all obligations of the Lessee
under the Operative Agreements and pay and perform (A) all
taxes, assessments and other governmental charges that may be
levied or assessed upon it or any of its property, and (B) all
other indebtedness, obligations and liabilities in accordance
with customary trade practices, which if not paid would have a
Material Adverse Effect; provided that the Lessee may contest
any item described in this Section 8.3(n)(ii) in good faith so
long as adequate reserves are maintained with respect thereto
in accordance with GAAP;
(iii) to the extent failure to do so would have a
Material Adverse Effect, observe and remain in compliance with
all applicable Laws and maintain in full force and effect all
Governmental Actions, in each case applicable to the conduct
of its business; keep in full force and effect all licenses,
certifications or accreditations necessary for any Facility to
carry on its business; and not permit the termination of any
insurance reimbursement program available to any Facility; and
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(iv) provided that the Agent, the Lenders and the
Holders use reasonable efforts to minimize disruption to the
business of the Lessee and subject to Section 12.13 permit
representatives of the Agent or any Lender or Holder, from
time to time, to visit and inspect its properties; inspect,
audit and make extracts from its books, records and files,
including without limitation management letters prepared by
independent accountants; and discuss with its principal
officers, and its independent accountants, its business,
assets, liabilities, financial condition, results of
operations and business prospects.
(o) The Lessee shall perform any and all obligations of Lessor
under, and cause Lessor to otherwise remain in full compliance with,
the terms and provisions of each Ground Lease, if any.
(p) The Lessee will promptly notify the Agent in the event the
Lessee discovers or determines that any computer application (including
those of any supplier, vendor or customer of the Lessee or any of its
Subsidiaries) that is material to its or any of its Subsidiaries'
business and operations will not be Year 2000 Compliant, except to the
extent that such failure shall not have and could not reasonably be
expected to have a Material Adverse Effect.
8.4. SHARING OF CERTAIN PAYMENTS.
Except for Excepted Payments, the parties hereto acknowledge and agree
that all payments due and owing by the Lessee to the Lessor under the Lease or
any of the other Operative Agreements shall be made by the Lessee directly to
the Agent as more particularly provided in Section 8.3 hereof. The Lessor, the
Holders, the Agent, the Lenders and the Lessee acknowledge the terms of Section
8.7 of this Agreement regarding the allocation of payments and other amounts
made or received from time to time under the Operative Agreements and agree,
that all such payments and amounts are to be allocated as provided in Section
8.7 of this Agreement.
8.5. GRANT OF EASEMENTS, ETC.
The Agent, the Lenders and the Holders hereby agree that, so long as no
Event of Default shall have occurred and be continuing, the Owner Trustee shall,
from time to time at the request of the Lessee (and with the prior consent of
the Agent), in connection with the transactions contemplated by the Agency
Agreement, the Lease or the other Operative Agreements, (i) grant easements and
other rights in the nature of easements with respect to any Property, (ii)
release existing easements or other rights in the nature of easements which are
for the benefit of any Property, (iii) execute and deliver to any Person any
instrument appropriate to confirm or effect such grants or releases, and (iv)
execute and deliver to any Person such other documents or materials in
connection with the acquisition, development, construction, testing or operation
of any Property, including without limitation reciprocal easement agreements,
construction contracts, operating agreements, development agreements, plats,
replats or subdivision documents; provided, that each of the agreements referred
to in this Section 8.5 shall be of the
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type normally executed by the Lessee in the ordinary course of the Lessee's
business and shall be on commercially reasonable terms so as not to diminish the
value of any Property in any material respect.
8.6. APPOINTMENT BY THE AGENT, THE LENDERS, THE HOLDERS AND THE OWNER
TRUSTEE.
The Holders hereby appoint the Agent to act as collateral agent for the
Holders in connection with the Lien granted by the Security Documents to secure
the Holder Amount. The Lenders and the Holders acknowledge and agree and direct
that the rights and remedies of the beneficiaries of the Lien of the Security
Documents shall be exercised by the Agent on behalf of the Lenders and the
Holders as directed from time to time by the Majority Secured Parties or,
pursuant to Sections 8.2(h) and 12.4, all of the Lenders and the Holders, as the
case may be; provided, in all cases, the Agent shall allocate payments and other
amounts received in accordance with Section 8.7. The Agent is further appointed
to provide notices under the Operative Agreements on behalf of the Owner Trustee
(as determined by the Agent, in its reasonable discretion), to receive notices
under the Operative Agreements on behalf of the Owner Trustee and (subject to
Sections 8.5 and 9.2) to take such other action under the Operative Agreements
on behalf of the Owner Trustee as the Agent shall determine in its reasonable
discretion from time to time. The Agent hereby accepts such appointments. For
purposes hereof, the provisions of Section 7 of the Credit Agreement, together
with such other terms and provisions of the Credit Agreement and the other
Operative Agreements as required for the full interpretation and operation of
Section 7 of the Credit Agreement are hereby incorporated by reference as if
restated herein for the mutual benefit of the Agent and each Holder as if each
Holder were a Lender thereunder. Outstanding Holder Advances and outstanding
Loans shall each be taken into account for purposes of determining Majority
Secured Parties. Further, the Agent shall be entitled to take such action on
behalf of the Owner Trustee as is delegated to the Agent under any Operative
Agreement (whether express or implied) as may be reasonably incidental thereto.
The parties hereto hereby agree to the provisions contained in this Section 8.6.
Any appointment of a successor agent under Section 7.9 of the Credit Agreement
shall also be effective as an appointment of a successor agent for purposes of
this Section 8.6.
8.7. COLLECTION AND ALLOCATION OF PAYMENTS AND OTHER AMOUNTS.
(a) The Lessee and the Construction Agent have agreed pursuant
to Section 5.8 and otherwise in accordance with the terms of this
Agreement to pay to (i) the Agent any and all Rent (excluding Excepted
Payments) and any and all other amounts of any kind or type under any
of the Operative Agreements due and owing or payable to any Person and
(ii) each Person as appropriate the Excepted Payments. Promptly after
receipt, the Agent shall apply and allocate, in accordance with the
terms of this Section 8.7, such amounts received from the Lessee or the
Construction Agent and all other payments, receipts and other
consideration of any kind whatsoever received by the Agent pursuant to
the Security Agreement or otherwise received by the Agent, the Holders
or any of the Lenders in connection with the Collateral, the Security
Documents or any of the other Operative Agreements. Ratable
distributions among the Lenders and the Holders under this Section 8.7
shall be made based on (in the case of the Lenders) the
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ratio of the outstanding Loans to the aggregate Property Cost and (in
the case of the Holders) the ratio of the outstanding Holder Advances
to the aggregate Property Cost. Ratable distributions among the Tranche
A Lenders under this Section 8.7 shall be made based on the ratio of
the individual Tranche A Lender's Commitment for Tranche A Loans to the
aggregate of all the Tranche A Lenders' Commitments for Tranche A
Loans. Ratable distributions among the Tranche B Lenders under this
Section 8.7 shall be made based on the ratio of the individual Tranche
B Lender's Commitment for Tranche B Loans to the aggregate of all the
Tranche B Lenders' Commitments for Tranche B Loans. Ratable
distributions among the Lenders (in situations where the Tranche A
Lenders are not differentiated from the Tranche B Lenders) shall be
made based on the ratio of the individual Lender's Commitment to the
aggregate of all the Lenders' Commitments. Ratable distributions among
the Holders under this Section 8.7 shall be based on the ratio of the
individual Holder's Holder Commitment to the aggregate of all the
Holders' Holder Commitments.
(b) Payments and other amounts received by the Agent from time
to time in accordance with the terms of subparagraph (a) shall be
applied and allocated as follows:
(i) Any such payment or amount identified as or
deemed to be Basic Rent shall be applied and allocated by the
Agent first, ratably to the Lenders and the Holders for
application and allocation to the payment of interest on the
Loans and thereafter the principal of the Loans which is due
and payable on such date and to the payment of accrued Holder
Yield with respect to the Holder Advances and thereafter the
portion of the Holder Advances which is due on such date; and
second, if no Default or Event of Default is in effect, any
excess shall be paid to such Person or Persons as the Lessee
may designate; provided, that if a Default or Event of Default
is in effect, such excess (if any) shall instead be held by
the Agent until the earlier of (I) the first date thereafter
on which no Default or Event of Default shall be in effect (in
which case such payments or returns shall then be made to such
other Person or Persons as the Lessee may designate) and (II)
the Maturity Date or the Expiration Date, as the case may be
(or, if earlier, the date of any Acceleration), in which case
such amounts shall be applied and allocated in the manner
contemplated by Section 8.7(b)(iv).
(ii) If on any date the Agent or the Lessor shall
receive any amount in respect of (A) any Casualty or
Condemnation pursuant to Sections 15.1(a) or 15.1(g) of the
Lease (excluding any payments in respect thereof which are
payable to the Lessee in accordance with the Lease), or (B)
the Termination Value in connection with the delivery of a
Termination Notice pursuant to Article XVI of the Lease, or
(C) the Termination Value in connection with the exercise of
the Purchase Option under Section 20.1 of the Lease or the
exercise of the option of the Lessor to transfer the
Properties to the Lessee pursuant to Section 20.3 of the
Lease, or (D) any payment required to be made or elected to be
made by the Construction Agent to the Lessor pursuant to the
terms of the Agency Agreement, then in each case, the Lessor
shall be required to pay such amount received (1) if
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no Acceleration has occurred, to prepay the principal balance
of the Loans and the Holder Advances, on a pro rata basis, a
portion of such amount to be distributed to the Lenders and
the Holders or (2) if an Acceleration has occurred, to apply
and allocate the proceeds respecting Sections 8.7(b)(ii)(A)
through 8.7(b)(ii)(D) in accordance with Section 8.7(b)(iii)
hereof.
(iii) Subject to Section 8.7(c), an amount equal to
any payment identified as proceeds of the sale or other
disposition (or lease upon the exercise of remedies) of the
Properties or any portion thereof, whether pursuant to Article
XXII of the Lease or the exercise of remedies under the
Security Documents or otherwise, the execution of remedies set
forth in the Lease and any payment in respect of excess wear
and tear pursuant to Section 22.3 of the Lease (whether such
payment relates to a period before or after the Construction
Period Termination Date) shall be applied and allocated by the
Agent first, ratably to the payment of the principal and
interest of the Tranche B Loans then outstanding, second,
ratably to the payment to the Holders of the outstanding
principal balance of all Holder Advances plus all outstanding
Holder Yield with respect to such outstanding Holder Advances,
third, to the extent such amount exceeds the maximum amount to
be returned pursuant to the foregoing provisions of this
paragraph (iii), ratably to the payment of the principal and
interest of the Tranche A Loans then outstanding, fourth, to
any and all other amounts owing under the Operative Agreements
to the Lenders under the Tranche B Loans, fifth, to any and
all other amounts owing under the Operative Agreements to the
Holders, sixth, to any and all other amounts owing under the
Operative Agreements to the Lenders under the Tranche A Loans,
and seventh, to the extent moneys remain after application and
allocation pursuant to clauses first through sixth above, to
the Owner Trustee for application and allocation to any and
all other amounts owing to the Holders or the Owner Trustee
and as the Holders shall determine; provided, where no Event
of Default shall exist and be continuing and a prepayment is
made for any reason with respect to less than the full amount
of the outstanding principal amount of the Loans and the
outstanding Holder Advances, the proceeds shall be applied and
allocated ratably to the Lenders and to the Holders.
(iv) Subject to Section 8.7(c), an amount equal to
(A) any such payment identified as a payment pursuant to
Section 22.1(b) of the Lease (or otherwise) of the Maximum
Residual Guarantee Amount (and any such lesser amount as may
be required by Section 22.1(b) of the Lease) in respect of the
Properties and (B) any other amount payable upon any exercise
of remedies after the occurrence of an Event of Default not
covered by Sections 8.7(b)(i) or 8.7(b)(iii) above (including
without limitation any amount received in connection with an
Acceleration which does not represent proceeds from the sale
or liquidation of the Properties), shall be applied and
allocated by the Agent first, ratably, to the payment of the
principal and interest balance of Tranche A Loans then
outstanding, second, ratably to the payment of the principal
and interest balance of the Tranche B Loans then outstanding,
third, ratably to the payment of
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the principal balance of all Holder Advances plus all
outstanding Holder Yield with respect to such outstanding
Holder Advances, fourth, to the payment of any other amounts
owing to the Lenders hereunder or under any of the other
Operative Agreement, and fifth, to the extent moneys remain
after application and allocation pursuant to clauses first
through fourth above, to the Owner Trustee for application and
allocation to Holder Advances and Holder Yield and any other
amounts owing to the Holders or the Owner Trustee as the
Holders shall determine.
(v) An amount equal to any such payment identified as
Supplemental Rent shall be applied and allocated by the Agent
to the payment of any amounts then owing to the Agent, the
Lenders, the Holders and the other parties to the Operative
Agreements (or any of them) (other than any such amounts
payable pursuant to the preceding provisions of this Section
8.7(b)) as shall be determined by the Agent in its reasonable
discretion; provided, however, that Supplemental Rent received
upon the exercise of remedies after the occurrence and
continuance of an Event of Default in lieu of or in
substitution of the Maximum Residual Guarantee Amount or as a
partial payment thereon shall be applied and allocated as set
forth in Section 8.7(b)(iv).
(vi) The Agent in its reasonable judgment shall
identify the nature of each payment or amount received by the
Agent and apply and allocate each such amount in the manner
specified above.
(c) Upon the termination of the Commitments and the payment in
full of the Loans and all other amounts owing by the Owner Trustee
hereunder or under any Credit Document and the payment in full of all
amounts owing to the Holders and the Owner Trustee under the Trust
Agreement, any moneys remaining with the Agent shall be returned to the
Owner Trustee or such other Person or Persons as the Holders may
designate for application and allocation to any and all other amounts
owing to the Holders or the Owner Trustee and as the Holders shall
determine. In the event of an Acceleration it is agreed that, prior to
the application and allocation of amounts received by the Agent in the
order described in Section 8.7(b) above, any such amounts shall first
be applied and allocated to the payment of (i) any and all sums
advanced by the Agent in order to preserve the Collateral or to
preserve its Lien thereon, (ii) the expenses of retaking, holding,
preparing for sale or lease, selling or otherwise disposing or
realizing on the Collateral, or of any exercise by the Agent of its
rights under the Security Documents, together with reasonable
attorneys' fees and expenses and court costs and (iii) any and all
other amounts reasonably owed to the Agent under or in connection with
the transactions contemplated by the Operative Agreements (including
without limitation any accrued and unpaid administration fees).
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8.8. RELEASE OF PROPERTIES, ETC.
If the Lessee shall at any time purchase any Property pursuant to the
Lease, or the Construction Agent shall purchase any Property pursuant to the
Agency Agreement, or if any Property shall be sold in accordance with Article
XXII of the Lease, then, upon satisfaction by the Owner Trustee of its
obligation to prepay the Loans, Holder Advances and all other amounts owing to
the Lenders and the Holders under the Operative Agreements, the Agent is hereby
authorized and directed to release such Properties from the Liens created by the
Security Documents to the extent of its interest therein. In addition, upon the
termination of the Commitments and the Holder Commitments and the payment in
full of the Loans, the Holder Advances and all other amounts owing by the Owner
Trustee and the Lessee hereunder or under any other Operative Agreement the
Agent is hereby authorized and directed to release all of the Properties from
the Liens created by the Security Documents to the extent of its interest
therein. Upon request of the Owner Trustee following any such release, the Agent
shall, at the sole cost and expense of the Lessee, execute and deliver to the
Owner Trustee and the Lessee such documents as the Owner Trustee or the Lessee
shall reasonably request to evidence such release.
SECTION 9. CREDIT AGREEMENT AND TRUST AGREEMENT.
9.1. THE CONSTRUCTION AGENT'S AND THE LESSEE'S CREDIT AGREEMENT RIGHTS.
Notwithstanding anything to the contrary contained in the Credit
Agreement, the Agent, the Lenders, the Holders, the Construction Agent, the
Lessee and the Owner Trustee hereby agree that, prior to the occurrence and
continuation of any Default or Event of Default, the Construction Agent or the
Lessee, as the case may be, shall have the following rights:
(a) the right to designate an account to which amounts funded
under the Operative Agreements shall be credited pursuant to Section
2.3(a) of the Credit Agreement;
(b) the right to terminate or reduce the Commitments pursuant
to Section 2.5(a) of the Credit Agreement;
(c) the right to exercise the conversion and continuation
options pursuant to Section 2.7 of the Credit Agreement;
(d) the right to receive any notice and any certificate, in
each case issued pursuant to Section 2.11(a) of the Credit Agreement;
(e) the right to replace any Lender pursuant to Section
2.11(b) of the Credit Agreement;
(f) the right to approve any successor agent pursuant to
Section 7.9 of the Credit Agreement; and
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(g) the right to consent to any assignment by a Lender to
which the Lessor has the right to consent pursuant to Section 9.8 of
the Credit Agreement.
9.2. THE CONSTRUCTION AGENT'S AND THE LESSEE'S TRUST AGREEMENT RIGHTS.
Notwithstanding anything to the contrary contained in the Trust
Agreement, the Construction Agent, the Lessee, the Owner Trustee and the Holders
hereby agree that, prior to the occurrence and continuation of any Default or
Event of Default, the Construction Agent or the Lessee, as the case may be,
shall have the following rights:
(a) the right to exercise the conversion and continuation
options pursuant to Section 3.8 of the Trust Agreement;
(b) the right to receive any notice and any certificate, in
each case issued pursuant to Section 3.9(a) of the Trust Agreement;
(c) the right to replace any Holder pursuant to Section 3.9(b)
of the Trust Agreement;
(d) the right to exercise the removal options contained in
Section 3.9 of the Trust Agreement; and
(e) no removal of the Owner Trustee and appointment of a
successor Owner Trustee pursuant to Section 9.1 of the Trust Agreement
shall be made without the prior written consent (not to be unreasonably
withheld or delayed) of the Lessee.
SECTION 10. TRANSFER OF INTEREST.
10.1. RESTRICTIONS ON TRANSFER.
Each Lender may participate, assign or transfer all or a portion of its
interest hereunder and under the other Operative Agreements in accordance with
Sections 9.7 and 9.8 of the Credit Agreement; provided, each participant,
assignee or transferee must obtain the same ratable interest in Tranche A Loans
and Tranche B Loans; provided further, that each Lender that participates,
assigns or transfers all or a portion of its interest hereunder and under the
other Operative Agreements shall deliver to the Agent a copy of each Assignment
and Acceptance (as referenced in Section 9.8 of the Credit Agreement) for
purposes of maintaining the Register. The Holders may, directly or indirectly,
assign, convey or otherwise transfer any of their right, title or interest in or
to the Trust Estate or the Trust Agreement with the prior written consent of the
Agent and the Lessee (which consent shall not be unreasonably withheld or
delayed) and in accordance with the terms of Section 11.8(b) of the Trust
Agreement. The Owner Trustee may, subject to the rights of the Lessee under the
Lease and the other Operative Agreements and to the Lien of the applicable
Security Documents but only with the prior written consent of the Agent (which
consent may be withheld by the Agent in its sole discretion) and (provided, no
Default or Event of Default has occurred and is continuing) with the consent of
the Lessee, directly or
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indirectly, assign, convey, appoint an agent with respect to enforcement of, or
otherwise transfer any of its right, title or interest in or to any Property,
the Lease, the Trust Agreement and the other Operative Agreements (including
without limitation any right to indemnification thereunder), or any other
document relating to a Property or any interest in a Property as provided in the
Trust Agreement and the Lease. The provisions of the immediately preceding
sentence shall not apply to the obligations of the Owner Trustee to transfer
Property to the Lessee or a third party purchaser pursuant to Article XXII of
the Lease upon payment for such Property in accordance with the terms and
conditions of the Lease. Neither the Lessee nor the Construction Agent may
assign any of the Operative Agreements or any of their respective rights or
obligations thereunder or with respect to any Property in whole or in part to
any Person without the prior written consent of the Agent, the Lenders, the
Holders and the Lessor.
10.2. EFFECT OF TRANSFER.
From and after any transfer effected in accordance with this Section
10, the transferor shall be released, to the extent of such transfer, from its
liability hereunder and under the other documents to which it is a party in
respect of obligations to be performed on or after the date of such transfer;
provided, however, that any transferor shall remain liable hereunder and under
such other documents to the extent that the transferee shall not have assumed
the obligations of the transferor thereunder. Upon any transfer by the Owner
Trustee, a Holder or a Lender as above provided, any such transferee shall
assume the obligations of the Owner Trustee, the Holder or the Lender, as the
case may be, and shall be deemed an "Owner Trustee", "Holder", or "Lender", as
the case may be, for all purposes of such documents and each reference herein to
the transferor shall thereafter be deemed a reference to such transferee for all
purposes, except as provided in the preceding sentence. Notwithstanding any
transfer of all or a portion of the transferor's interest as provided in this
Section 10, the transferor shall be entitled to all benefits accrued and all
rights vested prior to such transfer including without limitation rights to
indemnification under any such document.
SECTION 11. INDEMNIFICATION.
11.1. GENERAL INDEMNITY.
Subject to and limited by in all respects the provisions of Sections
11.6 through 11.8 and whether or not any of the transactions contemplated hereby
shall be consummated, the Indemnity Provider hereby assumes liability for and
agrees to defend, indemnify and hold harmless each Indemnified Person on an
After Tax Basis from and against any Claims, which may be imposed on, incurred
by or asserted against an Indemnified Person by any third party, including
without limitation Claims arising from the negligence of an Indemnified Person
(but not to the extent such Claims arise from the gross negligence or willful
misconduct of such Indemnified Person itself, as determined by a court of
competent jurisdiction, as opposed to gross negligence or willful misconduct
imputed to such Indemnified Person) in any way relating to or arising or alleged
to arise out of the execution, delivery, performance or enforcement of this
Agreement, the Lease or any other Operative Agreement or on or with respect to
any Property or any component thereof, including without limitation Claims in
any way relating to or arising or
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alleged to arise out of (a) the financing, refinancing, purchase, acceptance,
rejection, ownership, design, construction, refurbishment, development,
delivery, acceptance, nondelivery, leasing, subleasing, possession, use,
occupancy, operation, maintenance repair, modification, transportation,
condition, sale, return, repossession (whether by summary proceedings or
otherwise), or any other disposition of any Property or any part thereof,
including without limitation the acquisition, holding or disposition of any
interest in the Property, lease or agreement comprising a portion of any
thereof; (b) any latent or other defects in any Property or any portion thereof
whether or not discoverable by an Indemnified Person or the Indemnity Provider;
(c) a violation of Environmental Laws, Environmental Claims or other loss of or
damage to any property or the environment relating to the Property, the Lease,
the Agency Agreement or the Indemnity Provider; (d) the Operative Agreements, or
any transaction contemplated thereby; (e) any breach by the Indemnity Provider
of any of its representations or warranties under the Operative Agreements to
which the Indemnity Provider is a party or failure by the Indemnity Provider to
perform or observe any covenant or agreement to be performed by it under any of
the Operative Agreements; (f) the transactions contemplated hereby or by any
other Operative Agreement, in respect of the application of Parts 4 and 5 of
Subtitle B of Title I of ERISA; and (g) personal injury, death or property
damage, including without limitation Claims based on strict or absolute
liability in tort.
If a written Claim is made against any Indemnified Person or if any
proceeding shall be commenced against such Indemnified Person (including without
limitation a written notice of such proceeding), for any Claim, such Indemnified
Person shall promptly notify the Indemnity Provider in writing and shall not
take action with respect to such Claim without the consent of the Indemnity
Provider for thirty (30) days after the receipt of such notice by the Indemnity
Provider; provided, however, that in the case of any such Claim, if action shall
be required by law or regulation to be taken prior to the end of such period of
thirty (30) days, such Indemnified Person shall endeavor to, in such notice to
the Indemnity Provider, inform the Indemnity Provider of such shorter period,
and no action shall be taken with respect to such Claim without the consent of
the Indemnity Provider before seven (7) days before the end of such shorter
period; provided, further, that the failure of such Indemnified Person to give
the notices referred to in this sentence shall not diminish the Indemnity
Provider's obligation hereunder except to the extent such failure precludes in
all respects the Indemnity Provider from contesting such Claim.
If, within thirty (30) days of receipt of such notice from the
Indemnified Person (or such shorter period as the Indemnified Person has
notified the Indemnity Provider is required by law or regulation for the
Indemnified Person to respond to such Claim), the Indemnity Provider shall
request in writing that such Indemnified Person respond to such Claim, the
Indemnified Person shall, at the expense of the Indemnity Provider, in good
faith conduct and control such action (including without limitation by pursuit
of appeals) (provided, however, that (A) if such Claim, in the Indemnity
Provider's reasonable discretion, can be pursued by the Indemnity Provider on
behalf of or in the name of such Indemnified Person, the Indemnified Person, at
the Indemnity Provider's request, shall allow the Indemnity Provider to conduct
and control the response to such Claim and (B) in the case of any Claim (and
notwithstanding the provisions of the foregoing subsection (A)), the Indemnified
Person may request the Indemnity Provider to conduct and control the response to
such Claim (with counsel to be selected by the Indemnity
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Provider and consented to by such Indemnified Person, such consent not to be
unreasonably withheld; provided, however, that any Indemnified Person may retain
separate counsel at the expense of the Indemnity Provider in the event of a
conflict of interest between such Indemnified Person and the Indemnity
Provider)) by, in the sole discretion of the Person conducting and controlling
the response to such Claim (1) resisting payment thereof, (2) not paying the
same except under protest, if protest is necessary and proper, (3) if the
payment be made, using reasonable efforts to obtain a refund thereof in
appropriate administrative and judicial proceedings, or (4) taking such other
action as is reasonably requested by the Indemnity Provider from time to time.
The party controlling the response to any Claim shall consult in good
faith with the non-controlling party and shall keep the non-controlling party
reasonably informed as to the conduct of the response to such Claim; provided,
that all decisions ultimately shall be made in the discretion of the controlling
party. The parties agree that an Indemnified Person may at any time decline to
take further action with respect to the response to such Claim and may settle
such Claim if such Indemnified Person shall waive its rights to any indemnity
from the Indemnity Provider that otherwise would be payable in respect of such
Claim (and any future Claim, the pursuit of which is precluded by reason of such
resolution of such Claim) and shall pay to the Indemnity Provider any amount
previously paid or advanced by the Indemnity Provider pursuant to this Section
11.1 by way of indemnification or advance for the payment of an amount regarding
such Claim.
Notwithstanding the foregoing provisions of this Section 11.1, an
Indemnified Person shall not be required to take any action and the Indemnity
Provider shall not be permitted to respond to any Claim in its own name or that
of the Indemnified Person unless (A) the Indemnity Provider shall have agreed to
pay and shall pay to such Indemnified Person on demand and on an After Tax Basis
all reasonable costs, losses and expenses that such Indemnified Person actually
incurs in connection with such Claim, including without limitation all
reasonable legal, accounting and investigatory fees and disbursements and, if
the Indemnified Person has informed the Indemnity Provider that it intends to
contest such Claim (whether or not the control of the contest is then assumed by
the Indemnity Provider), the Indemnity Provider shall have agreed that the Claim
is an indemnifiable Claim hereunder, (B) in the case of a Claim that must be
pursued in the name of an Indemnified Person (or an Affiliate thereof), the
amount of the potential indemnity (taking into account all similar or logically
related Claims that have been or could be raised for which the Indemnity
Provider may be liable to pay an indemnity under this Section 11.1) exceeds
$25,000 (or such lesser amount as may be subsequently agreed between the
Indemnity Provider and the Indemnified Person), (C) the Indemnified Person shall
have reasonably determined that the action to be taken will not result in any
material danger of sale, forfeiture or loss of the Property, or any part thereof
or interest therein, will not interfere with the payment of Rent, and will not
result in risk of criminal liability, (D) if such Claim shall involve the
payment of any amount prior to the resolution of such Claim, the Indemnity
Provider shall provide to the Indemnified Person an interest-free advance in an
amount equal to the amount that the Indemnified Person is required to pay (with
no additional net after-tax cost to such Indemnified Person) prior to the date
such payment is due, (E) in the case of a Claim that must be pursued in the name
of an Indemnified Person (or an Affiliate thereof), the Indemnity Provider
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shall have provided to such Indemnified Person an opinion of independent counsel
selected by the Indemnity Provider and reasonably satisfactory to the
Indemnified Person stating that a reasonable basis exists to contest such Claim
(or, in the case of an appeal of an adverse determination, an opinion of such
counsel to the effect that the position asserted in such appeal will more likely
than not prevail) and (F) no Event of Default shall have occurred and be
continuing. In no event shall an Indemnified Person be required to appeal an
adverse judicial determination to the United States Supreme Court. In addition,
an Indemnified Person shall not be required to contest any Claim in its name (or
that of an Affiliate) if the subject matter thereof shall be of a continuing
nature and shall have previously been decided adversely by a court of competent
jurisdiction pursuant to the contest provisions of this Section 11.1, unless
there shall have been a change in law (or interpretation thereof) and the
Indemnified Person shall have received, at the Indemnity Provider's expense, an
opinion of independent counsel selected by the Indemnity Provider and reasonably
acceptable to the Indemnified Person stating that as a result of such change in
law (or interpretation thereof), it is more likely than not that the Indemnified
Person will prevail in such contest. In no event shall the Indemnity Provider be
permitted to adjust or settle any Claim without the consent of the Indemnified
Person to the extent any such adjustment or settlement involves, or is
reasonably likely to involve, any performance by or adverse admission by or with
respect to the Indemnified Person.
11.2. GENERAL TAX INDEMNITY.
(a) Subject to and limited by in all respects the provisions
of Sections 11.6 through 11.8, the Indemnity Provider shall pay and
assume liability for, and does hereby agree to indemnify, protect and
defend each Property and all Indemnified Persons, and hold them
harmless against, all Impositions on an After Tax Basis, and all
payments pursuant to the Operative Agreements shall be made free and
clear of and without deduction for any and all present and future
Impositions.
(b) Notwithstanding anything to the contrary in Section
11.2(a) hereof, the following shall be excluded from the indemnity
required by Section 11.2(a):
(i) Taxes (other than Taxes that are, or are in the
nature of, sales, use, rental, value added, transfer or
property taxes) that are imposed on a Indemnified Person
(other than the Lessor, the Owner Trustee and the Trust) by
the United States federal government that are based on or
measured by the net income (including without limitation taxes
based on capital gains and minimum taxes) of such Person;
provided, that this clause (i) shall not be interpreted to
prevent a payment from being made on an After Tax Basis if
such payment is otherwise required to be so made;
(ii) Taxes (other than Taxes that are, or are in the
nature of, sales, use, rental, value added, transfer or
property taxes) that are imposed on any Indemnified Person
(other than the Lessor, the Owner Trustee and the Trust) by
any state or local jurisdiction or taxing authority within any
state or local jurisdiction and that are based upon or
measured by the net income (including
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without limitation taxes based on capital gains and minimum
taxes) of such Person; provided that such Taxes shall not be
excluded under this subparagraph (ii) to the extent such Taxes
would have been imposed had the location, possession or use of
any Property in, the location or the operation of the Lessee
in, or the Lessee's making payments under the Operative
Agreements from, the jurisdiction imposing such Taxes been the
sole connection between such Indemnified Person and the
jurisdiction imposing such Taxes; provided, further, that this
clause (ii) shall not be interpreted to prevent a payment from
being made on an After Tax Basis if such payment is otherwise
required to be so made;
(iii) any Tax to the extent it relates to any act,
event or omission that occurs after the termination of the
Lease and redelivery or sale of the Property in accordance
with the terms of the Lease (but not any Tax that relates to
such termination, redelivery or sale and/or to any period
prior to such termination, redelivery or sale); and
(iv) any Taxes which are imposed on an Indemnified
Person as a result of the gross negligence or willful
misconduct of such Indemnified Person itself, as determined by
a court of competent jurisdiction (as opposed to gross
negligence or willful misconduct imputed to such Indemnified
Person), but not Taxes imposed as a result of ordinary
negligence of such Indemnified Person;
(c) (i) Subject to the terms of Section 11.2(f), the Indemnity
Provider shall pay or cause to be paid all Impositions
directly to the taxing authorities where feasible and
otherwise to the Indemnified Person, as appropriate, and the
Indemnity Provider shall at its own expense, upon such
Indemnified Person's reasonable request, furnish to such
Indemnified Person copies of official receipts or other
satisfactory proof evidencing such payment.
(ii) In the case of Impositions for which no contest
is conducted pursuant to Section 11.2(f) and which the
Indemnity Provider pays directly to the taxing authorities,
the Indemnity Provider shall pay such Impositions prior to the
latest time permitted by the relevant taxing authority for
timely payment. In the case of Impositions for which the
Indemnity Provider reimburses an Indemnified Person, the
Indemnity Provider shall do so within thirty (30) days after
receipt by the Indemnity Provider of demand by such
Indemnified Person describing in reasonable detail the nature
of the Imposition and the basis for the demand (including
without limitation the computation of the amount payable),
accompanied by receipts or other reasonable evidence of such
demand. In the case of Impositions for which a contest is
conducted pursuant to Section 11.2(f), the Indemnity Provider
shall pay such Impositions or reimburse such Indemnified
Person for such Impositions, to the extent not previously paid
or reimbursed pursuant to subsection (a), prior to the latest
time permitted by the relevant taxing authority for timely
payment after conclusion of all contests under Section
11.2(f).
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(iii) At the Indemnity Provider's request, the amount
of any indemnification payment by the Indemnity Provider
pursuant to subsection (a) shall be verified and certified by
an independent public accounting firm mutually acceptable to
the Indemnity Provider and the Indemnified Person. The fees
and expenses of such independent public accounting firm shall
be paid by the Indemnity Provider unless such verification
shall result in an adjustment in the Indemnity Provider's
favor of fifteen percent (15%) or more of the payment as
computed by the Indemnified Person, in which case such fee
shall be paid by the Indemnified Person.
(d) The Indemnity Provider shall be responsible for preparing
and filing any real and personal property or ad valorem tax returns in
respect of each Property and any other tax returns required for the
Owner Trustee respecting the transactions described in the Operative
Agreements. In case any other report or tax return shall be required to
be made with respect to any obligations of the Indemnity Provider under
or arising out of subsection (a) and of which the Indemnity Provider
has knowledge or should have knowledge, the Indemnity Provider, at its
sole cost and expense, shall notify the relevant Indemnified Person of
such requirement and (except if such Indemnified Person notifies the
Indemnity Provider that such Indemnified Person intends to prepare and
file such report or return) (A) to the extent required or permitted by
and consistent with Legal Requirements, make and file in the Indemnity
Provider's name such return, statement or report; and (B) in the case
of any other such return, statement or report required to be made in
the name of such Indemnified Person, advise such Indemnified Person of
such fact and prepare such return, statement or report for filing by
such Indemnified Person or, where such return, statement or report
shall be required to reflect items in addition to any obligations of
the Indemnity Provider under or arising out of subsection (a), provide
such Indemnified Person at the Indemnity Provider's expense with
information sufficient to permit such return, statement or report to be
properly made with respect to any obligations of the Indemnity Provider
under or arising out of subsection (a). Such Indemnified Person shall,
upon the Indemnity Provider's request and at the Indemnity Provider's
expense, provide any data maintained by such Indemnified Person (and
not otherwise available to or within the control of the Indemnity
Provider) with respect to each Property which the Indemnity Provider
may reasonably require to prepare any required tax returns or reports.
(e) As between the Indemnity Provider on one hand, and each
Financing Party on the other hand, the Indemnity Provider shall be
responsible for, and the Indemnity Provider shall indemnify and hold
harmless each Financing Party (without duplication of any
indemnification required by subsection (a)) on an After Tax Basis
against, any obligation for United States or foreign withholding taxes
or similar levies, imposts, charges, fees, deductions or withholdings
(collectively, "Withholdings") imposed in respect of the interest
payable on the Notes, Holder Yield payable on the Certificates or with
respect to any other payments under the Operative Agreements (all such
payments being referred to herein as "Exempt Payments" to be made
without deduction, withholding or set off) (and, if any Financing Party
receives a demand for such payment
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from any taxing authority or a Withholding is otherwise required with
respect to any Exempt Payment, the Indemnity Provider shall discharge
such demand on behalf of such Financing Party); provided, however, that
the obligation of the Indemnity Provider under this Section 11.2(e)
shall not apply to:
(i) Withholdings on any Exempt Payment to any
Financing Party which is a non-U.S. Person unless such
Financing Party is, on the date hereof (or on the date it
becomes a Financing Party hereunder) and on the date of any
change in the principal place of business or the lending
office of such Financing Party, entitled to submit a Form 1001
(relating to such Financing Party and entitling it to a
complete exemption from Withholding on such Exempt Payment) or
Form 4224 or is otherwise subject to exemption from
Withholding with respect to such Exempt Payment (except where
the failure of the exemption results from a change in the
principal place of business of the Lessee; provided if a
failure of exemption for any Financing Party results from a
change in the principal place of business or lending office of
any other Financing Party, then such other Financing Party
shall be liable for any Withholding or indemnity with respect
thereto), or
(ii) Any U.S. Taxes imposed solely by reason of the
failure by a non-U.S. Person to comply with applicable
certification, information, documentation or other reporting
requirements concerning the nationality, residence, identity
or connections with the United States of America of such
non-U.S. Person if such compliance is required by statute or
regulation of the United States of America as a precondition
to relief or exemption from such U.S. Taxes.
For the purposes of this Section 11.2(e), (A) "U.S. Person" shall mean
a citizen, national or resident of the United States of America, a
corporation, partnership or other entity created or organized in or
under any laws of the United States of America or any State thereof, or
any estate or trust that is subject to Federal income taxation
regardless of the source of its income, (B) "U.S. Taxes" shall mean any
present or future tax, assessment or other charge or levy imposed by or
on behalf of the United States of America or any taxing authority
thereof or therein, (C) "Form 1001" shall mean Form 1001 (Ownership,
Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America and (D) "Form 4224" shall mean
Form 4224(R) (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States)
of the Department of Treasury of the United States of America (or in
relation to either such Form such successor and related forms as may
from time to time be adopted by the relevant taxing authorities of the
United States of America to document a claim to which such Form
relates). Each of the Forms referred to in the foregoing clauses (C)
and (D) shall include such successor and related forms as may from time
to time be adopted by the relevant taxing authorities of the United
States of America to document a claim to which such Form relates.
If a Financing Party or an Affiliate with whom such Financing
Party files a consolidated tax return (or equivalent) subsequently
receives the benefit in any country of
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a tax credit or an allowance resulting from U.S. Taxes with respect to
which it has received a payment of an additional amount under this
Section 11.2(e), such Financing Party will pay to the Indemnity
Provider such part of that benefit as in the opinion of such Financing
Party will leave it (after such payment) in a position no more and no
less favorable than it would have been in if no additional payment had
been required to be paid, provided always that (i) such Financing Party
will be the sole judge of the amount of any such benefit and of the
date on which it is received, (ii) such Financing Party will have the
absolute discretion as to the order and manner in which it employs or
claims tax credits and allowances available to it and (iii) such
Financing Party will not be obliged to disclose to the Indemnity
Provider any information regarding its tax affairs or tax computations.
Each non-U.S. Person that shall become a Financing Party after
the date hereof shall, upon the effectiveness of the related transfer
or otherwise upon becoming a Financing Party hereunder, be required to
provide all of the forms and statements referenced above or other
evidences of exemption from Withholdings.
(f) If a written Claim is made against any Indemnified Person
or if any proceeding shall be commenced against such Indemnified Person
(including without limitation a written notice of such proceeding), for
any Impositions, the provisions in Section 11.1 relating to
notification and rights to contest shall apply; provided, however, that
the Indemnity Provider shall have the right to conduct and control such
contest only if such contest involves a Tax other than a Tax on net
income of the Indemnified Person and can be pursued independently from
any other proceeding involving a Tax liability of such Indemnified
Person.
11.3. INCREASED COSTS, ILLEGALITY, ETC.
(a) If, due to either (i) the introduction of or any change in
or in the interpretation of any law or regulation or (ii) the
compliance with any guideline or request hereafter adopted, promulgated
or made by any central bank or other governmental authority (whether or
not having the force of law), there shall be any increase in the cost
to any Financing Party of agreeing to make or making, funding or
maintaining Advances, then the Lessee shall from time to time, upon
demand by such Financing Party (with a copy of such demand to the Agent
but subject to the terms of Section 2.11 of the Credit Agreement and
3.9 of the Trust Agreement, as the case may be), pay to the Agent for
the account of such Financing Party additional amounts sufficient to
compensate such Financing Party for such increased cost. A certificate
as to the amount of such increased cost, submitted to the Lessee and
the Agent by such Financing Party, shall be conclusive and binding for
all purposes, absent manifest error.
(b) If any Financing Party determines that compliance with any
law or regulation or any guideline or request from any central bank or
other governmental authority (whether or not having the force of law,
but in each case promulgated or made after the date hereof) affects or
would affect the amount of capital required or expected to
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be maintained by such Financing Party or any corporation controlling
such Financing Party and that the amount of such capital is increased
by or based upon the existence of such Financing Party's commitment to
make Advances and other commitments of this type or upon the Advances,
then, upon demand by such Financing Party (with a copy of such demand
to the Agent but subject to the terms of Section 2.11 of the Credit
Agreement and 3.9 of the Trust Agreement), the Lessee shall pay to the
Agent for the account of such Financing Party, from time to time as
specified by such Financing Party, additional amounts sufficient to
compensate such Financing Party or such corporation in the light of
such circumstances, to the extent that such Financing Party reasonably
determines such increase in capital to be allocable to the existence of
such Financing Party's commitment to make such Advances. A certificate
as to such amounts submitted to the Lessee and the Agent by such
Financing Party shall be conclusive and binding for all purposes,
absent manifest error.
(c) Without limiting the effect of the foregoing, the Lessee
shall pay to each Financing Party on the last day of the Interest
Period therefor so long as such Financing Party is maintaining reserves
against "Eurocurrency liabilities" under Regulation D an additional
amount (determined by such Financing Party and notified to the Lessee
through the Agent) equal to the product of the following for each
Eurodollar Loan or Eurodollar Holder Advance, as the case may be, for
each day during such Interest Period:
(i) the principal amount of such Eurodollar Loan or
Eurodollar Holder Advance, as the case may be, outstanding on
such day; and
(ii) the remainder of (x) a fraction the numerator of
which is the rate (expressed as a decimal) at which interest
accrues on such Eurodollar Loan or Eurodollar Holder Advance,
as the case may be, for such Interest Period as provided in
the Credit Agreement or the Trust Agreement, as the case may
be (less the Applicable Percentage), and the denominator of
which is one (1) minus the effective rate (expressed as a
decimal) at which such reserve requirements are imposed on
such Financing Party on such day minus (y) such numerator; and
(iii) 1/360.
(d) Without affecting its rights under Sections 11.3(a),
11.3(b) or 11.3(c) or any other provision of any Operative Agreement,
each Financing Party agrees that if there is any increase in any cost
to or reduction in any amount receivable by such Financing Party with
respect to which the Lessee would be obligated to compensate such
Financing Party pursuant to Sections 11.3(a) or 11.3(b), such Financing
Party shall use reasonable efforts to select an alternative office for
Advances which would not result in any such increase in any cost to or
reduction in any amount receivable by such Financing Party; provided,
however, that no Financing Party shall be obligated to select an
alternative office for Advances if such Financing Party determines that
(i) as a result of such selection such Financing Party would be in
violation of any applicable law, regulation, treaty, or guideline, or
would incur additional costs or expenses or (ii) such selection
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would be inadvisable for regulatory reasons or materially inconsistent
with the interests of such Financing Party.
(e) With reference to the obligations of the Lessee set forth
in Sections 11.3(a) through 11.3(d), the Lessee shall not have any
obligation to pay to any Financing Party amounts owing under such
Sections for any period which is more than one (1) year prior to the
date upon which the request for payment therefor is delivered to the
Lessee.
(f) Notwithstanding any other provision of this Agreement, if
any Financing Party shall notify the Agent that the introduction of or
any change in or in the interpretation of any law or regulation makes
it unlawful, or any central bank or other governmental authority
asserts that it is unlawful, for any Financing Party to perform its
obligations hereunder to make or maintain Eurodollar Loans or
Eurodollar Holder Advances, as the case may be, then (i) each
Eurodollar Loan or Eurodollar Holder Advance, as the case may be, will
automatically, at the earlier of the end of the Interest Period for
such Eurodollar Loan or Eurodollar Holder Advance, as the case may be,
or the date required by law, convert into an ABR Loan or an ABR Holder
Advance, as the case may be, and (iii) the obligation of the Financing
Parties to make, convert or continue Eurodollar Loans or Eurodollar
Holder Advances, as the case may be, shall be suspended until the Agent
shall notify the Lessee that such Financing Party has determined that
the circumstances causing such suspension no longer exist.
11.4. FUNDING/CONTRIBUTION INDEMNITY.
Subject to the provisions of Section 2.11(a) of the Credit Agreement
and 3.9(a) of the Trust Agreement, as the case may be, the Lessee agrees to
indemnify each Financing Party and to hold each Financing Party harmless from
any loss or reasonable expense which such Financing Party may sustain or incur
as a consequence of (a) any default in connection with the drawing of funds for
any Advance, (b) any default in making any prepayment after a notice thereof has
been given in accordance with the provisions of the Operative Agreements or (c)
the making of a voluntary or involuntary prepayment of Eurodollar Loans or
Eurodollar Holder Advances, as the case may be, on a day which is not the last
day of an Interest Period with respect thereto. Such indemnification shall be in
an amount equal to the excess, if any, of (x) the amount of interest or Holder
Yield, as the case may be, which would have accrued on the amount so prepaid, or
not so borrowed, accepted, converted or continued for the period from the date
of such prepayment or of such failure to borrow, accept, convert or continue to
the last day of such Interest Period (or, in the case of a failure to borrow,
accept, convert or continue, the Interest Period that would have commenced on
the date of such failure) in each case at the applicable Eurodollar Rate plus
the Applicable Percentage for such Loan or Holder Advance, as the case may be,
for such Interest Period over (y) the amount of interest (as determined by such
Financing Party in its reasonable discretion) which would have accrued to such
Financing Party on such amount by (i) (in the case of the Lenders) reemploying
such funds in loans of the same type and amount during the period from the date
of prepayment or failure to borrow to the last day of the then applicable
Interest Period (or, in the case of a failure to borrow, the Interest Period
that would have commenced on the date of such failure) and (ii) (in the case of
the Holders) placing such amount on deposit for a
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comparable period with leading banks in the relevant interest rate market. This
covenant shall survive the termination of the Operative Agreements and the
payment of all other amounts payable hereunder.
11.5. EXPRESS INDEMNIFICATION FOR ORDINARY NEGLIGENCE, STRICT
LIABILITY, ETC.
WITHOUT LIMITING THE GENERALITY OF THE INDEMNIFICATION PROVISIONS OF
ANY AND ALL OF THE OPERATIVE AGREEMENTS, EACH PERSON PROVIDING INDEMNIFICATION
OF ANOTHER PERSON UNDER ANY OPERATIVE AGREEMENT HEREBY FURTHER EXPRESSLY
RELEASES EACH BENEFICIARY OF ANY SUCH INDEMNIFICATION FROM ALL CLAIMS FOR LOSS
OR DAMAGE, DESCRIBED IN ANY OPERATIVE AGREEMENT, CAUSED BY ANY ACT OR OMISSION
ON THE PART OF ANY SUCH BENEFICIARY ATTRIBUTABLE TO THE ORDINARY NEGLIGENCE
(WHETHER SOLE OR CONTRIBUTORY) OR STRICT LIABILITY OF ANY SUCH BENEFICIARY, AND
INDEMNIFIES, EXONERATES AND HOLDS EACH SUCH BENEFICIARY FREE AND HARMLESS FROM
AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, CLAIMS, LOSSES, COSTS,
LIABILITIES, DAMAGES AND EXPENSES (INCLUDING WITHOUT LIMITATION ATTORNEY'S FEES
AND EXPENSES), DESCRIBED ABOVE, INCURRED BY ANY SUCH BENEFICIARY (IRRESPECTIVE
OF WHETHER ANY SUCH BENEFICIARY IS A PARTY TO THE ACTION FOR WHICH
INDEMNIFICATION UNDER THIS AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT IS SOUGHT)
ATTRIBUTABLE TO THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OR STRICT
LIABILITY OF ANY SUCH BENEFICIARY.
11.6. ADDITIONAL PROVISIONS REGARDING ENVIRONMENTAL INDEMNIFICATION.
Each and every Indemnified Person shall at all times have the rights
and benefits, and the Indemnity Provider shall have the obligations, in each
case provided pursuant to the Operative Agreements with respect to environmental
matters, violations of any Environmental Law, any Environmental Claim or other
loss of or damage to any property or the environment relating to any Property,
the Lease, the Agency Agreement or the Indemnity Provider (including without
limitation the rights and benefits provided pursuant to Section 11.1(c).
11.7. ADDITIONAL PROVISIONS REGARDING INDEMNIFICATION.
Notwithstanding the provisions of Sections 11.1, 11.2 and 11.5 (other
than with respect to matters concerning environmental indemnification referenced
in Section 11.6), (a) the Owner Trustee shall be the only beneficiary of the
provisions set forth in Sections 11.1, 11.2 and 11.5 (again, subject to the
immediately preceding parenthetical phrase) with respect to each Property during
the Construction Period for such Property and (b) such limited rights of
indemnification referenced in Section 11.7(a) (to the extent relating to
third-party claims) shall be limited to third-party claims caused by or
resulting from the Indemnity Provider's acts or omissions and/or
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all other Persons acting by, through or under the Indemnity Provider. After the
Construction Period for a Property, each Indemnified Person shall be a
beneficiary of the provisions set forth in Sections 11.1, 11.2 and 11.5.
11.8. INDEMNIFICATIONS PROVIDED BY THE OWNER TRUSTEE IN FAVOR OF
THE OTHER INDEMNIFIED PERSONS.
To the extent the Indemnity Provider is not obligated to indemnify each
Indemnified Person with respect to the various matters described in this Section
11.8, the Owner Trustee shall provide such indemnities (but only to the extent
amounts sufficient to pay such indemnity are funded by the Lenders and the
Holders) in favor of each Indemnified Person in accordance with this Section
11.8 and shall pay all such amounts owed with respect to this Section 11.8 with
amounts advanced by the Lenders and the Holders (a) to the extent, but only to
the extent, amounts are available therefor with respect to the Available
Commitments and the Available Holder Commitments and (b) unless each Lender and
each Holder has declined in writing to fund such amount. Notwithstanding any
other provision in any other Operative Agreement to the contrary, all amounts so
advanced shall be deemed added (ratably, based on the ratio of the Property Cost
for each Property individually to the Aggregate Property Cost of all Properties
at such time) to the Property Cost of all Properties then subject to the terms
of the Operative Agreements.
Whether or not any of the transactions contemplated hereby shall be
consummated, the Owner Trustee hereby assumes liability for and agrees to
defend, indemnify and hold harmless each Indemnified Person on an After Tax
Basis from and against any Claims, which may be imposed on, incurred by or
asserted against an Indemnified Person by any third party, including without
limitation Claims arising from the negligence of an Indemnified Person (but not
to the extent such Claims arise from the gross negligence or willful misconduct
of such Indemnified Person itself, as determined by a court of competent
jurisdiction, as opposed to gross negligence or willful misconduct imputed to
such Indemnified Person or breach of such Indemnified Person's obligations under
this Agreement, the Lease or any other Operative Agreement) in any way relating
to or arising or alleged to arise out of the execution, delivery, performance or
enforcement of this Agreement, the Lease or any other Operative Agreement or on
or with respect to any Property or any component thereof, including without
limitation Claims in any way relating to or arising or alleged to arise out of
the matters set forth in Sections 11.1(a) through 11.1(h).
The Owner Trustee shall pay and assume liability for, and does hereby
agree to indemnify, protect and defend each Property and all Indemnified
Persons, and hold them harmless against, all Impositions on an After Tax Basis,
and all payments pursuant to the Operative Agreements shall be made free and
clear of and without deduction for any and all present and future Impositions.
Notwithstanding anything to the contrary in this paragraph, the Excluded Taxes
shall be excluded from the indemnity provisions afforded by this paragraph.
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THE INDEMNITY OBLIGATIONS UNDERTAKEN BY THE OWNER TRUSTEE PURSUANT TO
THIS SECTION 11.8 ARE IN ALL RESPECTS SUBJECT TO THE LIMITATIONS ON LIABILITY
REFERENCED IN SECTION 12.9.
SECTION 12. MISCELLANEOUS.
12.1. SURVIVAL OF AGREEMENTS.
The representations, warranties, covenants, indemnities and agreements
of the parties provided for in the Operative Agreements, and the parties'
obligations under any and all thereof, shall survive the execution and delivery
of this Agreement, the transfer of any Property to the Owner Trustee, the
acquisition of any Property (or any of its components), the construction of any
Improvements, the Completion of any Property, any disposition of any interest of
the Owner Trustee in any Property or any interest of the Holders in the Trust
Estate, the payment of the Notes and any disposition thereof and shall be and
continue in effect notwithstanding any investigation made by any party and the
fact that any party may waive compliance with any of the other terms, provisions
or conditions of any of the Operative Agreements. Except as otherwise expressly
set forth herein or in other Operative Agreements, the indemnities of the
parties provided for in the Operative Agreements shall survive the expiration or
termination of any thereof.
12.2. NOTICES.
All notices required or permitted to be given under any Operative
Agreement shall be in writing. Notices may be served by certified or registered
mail, postage paid with return receipt requested; by private courier, prepaid;
by telex, facsimile, or other telecommunication device capable of transmitting
or creating a written record; or personally. Mailed notices shall be deemed
delivered five (5) days after mailing, properly addressed. Couriered notices
shall be deemed delivered when delivered as addressed, or if the addressee
refuses delivery, when presented for delivery notwithstanding such refusal.
Telex or telecommunicated notices shall be deemed delivered when receipt is
either confirmed by confirming transmission equipment or acknowledged by the
addressee or its office. Personal delivery shall be effective when accomplished.
Unless a party changes its address by giving notice to the other party as
provided herein, notices shall be delivered to the parties at the following
addresses:
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If to the Construction Agent or the Lessee, to such entity at
the following address:
Applied Analytical Industries, Inc.
5051 New Centre Drive
Wilmington, North Carolina 28403
Attention: Stephen F. Rizzo
Vice President and Controller
Telephone: (910) 392-1606
Telecopy: (910) 392-7368
If to the Owner Trustee, to it at the following address:
First Security Bank, National Association
79 South Main Street
Salt Lake City, Utah 84111
Attention: Val T. Orton,
Vice President
Telephone: (801) 246-5300
Telecopy: (801) 246-5053
If to the Holders, to each such Holder at the address set
forth for such Holder on Schedule I of the Trust Agreement.
If to the Agent, to it at the following address:
NationsBank, N.A.
155 N. Front Street
Wilmington, NC 28401
Attention: David Houston
Telephone: (910) 251-5325
Telecopy: (910) 251-5251
If to any Lender, to it at the address set forth for such
Lender in Schedule 1.1 of the Credit Agreement.
From time to time any party may designate additional parties
and/or another address for notice purposes by notice to each of the
other parties hereto. Each notice hereunder shall be effective upon
receipt or refusal thereof.
12.3. COUNTERPARTS.
This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute but one (1) and the same
instrument.
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12.4. TERMINATIONS, AMENDMENTS, WAIVERS, ETC.; UNANIMOUS VOTE MATTERS.
Each Basic Document may be terminated, amended, supplemented, waived or
modified only by an instrument in writing signed by, subject to Article VIII of
the Trust Agreement regarding termination of the Trust Agreement, the Majority
Secured Parties and the Lessee and/or the Construction Agent (to the extent the
Lessee and/or the Construction Agent is a party to such Basic Document);
provided, to the extent no Default or Event of Default shall have occurred and
be continuing, the Majority Secured Parties shall not amend, supplement, waive
or modify any provision of any Basic Document in such a manner as to adversely
affect the rights of the Lessee and/or the Construction Agent without the prior
written consent (not to be unreasonably withheld or delayed) of the Lessee
and/or the Construction Agent. Each Operative Agreement which is not a Basic
Document may be terminated, amended, supplemented, waived or modified only by an
instrument in writing signed by the parties thereto and (without the consent of
any other Financing Party) the Agent. In addition, (a) the Unanimous Vote
Matters shall require the consent of each Lender and each Holder affected by
such matter and (b) any provision of any Operative Agreement incorporated by
reference or otherwise referenced in a second Operative Agreement shall remain,
respecting such second Operative Agreement, in its original form without regard
to any such termination, amendment, supplement, waiver or modification in the
first Operative Agreement except if such has been agreed to by an instrument in
writing signed by, subject to Article VIII of the Trust Agreement regarding
termination of the Trust Agreement, the Majority Secured Parties and the Lessee
and/or the Construction Agent (to the extent the Lessee and/or the Construction
Agent is a party to such Operative Agreement).
Notwithstanding the foregoing, no such termination, amendment,
supplement, waiver or modification shall, without the consent of the Agent and,
to the extent affected thereby, each Lender and each Holder (collectively, the
"Unanimous Vote Matters") (i) reduce the amount of any Note or any Certificate,
extend the scheduled date of maturity of any Note, extend the scheduled
Expiration Date, extend any payment date of any Note or Certificate, reduce the
stated rate of interest payable on any Note, reduce the stated Holder Yield
payable on any Certificate (other than as a result of waiving the applicability
of any post-default increase in interest rates or Holder Yields), modify the
priority of any Lien in favor of the Agent under any Security Document,
subordinate any obligation owed to any Lender or Holder, reduce any Lender
Unused Fees or any Holder Unused Fees payable under this Participation
Agreement, extend the scheduled date of payment of any Lender Unused Fees or any
Holder Unused Fees or increase the amount or extend the expiration date of any
Lender's Commitment or the Holder Commitment of any Holder, or (ii) terminate,
amend, supplement, waive or modify any provision of this Section 12.4 or reduce
the percentages specified in the definitions of Majority Lenders, Majority
Holders or Majority Secured Parties, or consent to the assignment or transfer by
the Owner Trustee of any of its rights and obligations under any Credit Document
or release a material portion of the Collateral (except in accordance with
Section 8.8) or release the Lessee from its obligations under any Operative
Agreement or otherwise alter any payment obligations of the Lessee to the Lessor
or any Financing Party under the Operative Agreements, or (iii) terminate,
amend, supplement, waive or modify any provision of Section 7 of the Credit
Agreement (which shall also require the consent of the Agent), or (iv) permit
Advances for Work in excess of the Construction Budget, or (v) eliminate the
automatic option under Section 5.3(b)
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of the Agency Agreement requiring that the Construction Agent pay certain
liquidated damages in exchange for the conveyance of a Property to the
Construction Agent, or (vi) permit the extension of the Construction Period
beyond the date that is two (2) years from the Initial Closing Date. Any such
termination, amendment, supplement, waiver or modification shall apply equally
to each of the Lenders and the Holders and shall be binding upon all the parties
to this Agreement. In the case of any waiver, each party to this Agreement shall
be restored to its former position and rights under the Operative Agreements,
and any Default or Event of Default waived shall be deemed to be cured and not
continuing; but no such waiver shall extend to any subsequent or other Default
or Event of Default, or impair any right consequent thereon.
If at a time when the conditions precedent set forth in the Operative
Agreements to any Loan are, in the opinion of the Majority Lenders, satisfied,
any Lender shall fail to fulfill its obligations to make such Loan (any such
Lender, a "Defaulting Lender") then, for so long as such failure shall continue,
the Defaulting Lender shall (unless the Lessee and the Majority Lenders,
determined as if the Defaulting Lender were not a "Lender", shall otherwise
consent in writing) be deemed for all purposes relating to terminations,
amendments, supplements, waivers or modifications under the Operative Agreements
to have no Loans, shall not be treated as a "Lender" when performing the
computation of Majority Lenders or Majority Secured Parties, and shall have no
rights under this Section 12.4; provided that any action taken pursuant to the
second paragraph of this Section 12.4 shall not be effective as against the
Defaulting Lender.
If at a time when the conditions precedent set forth in the Operative
Agreements to any Holder Advance are, in the opinion of the Majority Holders,
satisfied, any Holder shall fail to fulfill its obligations to make such Holder
Advance (any such Holder, a "Defaulting Holder") then, for so long as such
failure shall continue, the Defaulting Holder shall (unless the Lessee and the
Majority Holders, determined as if the Defaulting Holder were not a "Holder",
shall otherwise consent in writing) be deemed for all purposes relating to
terminations, amendments, supplements, waivers or modifications under the
Operative Agreements to have no Holder Advances, shall not be treated as a
"Holder" when performing the computation of Majority Holders or Majority Secured
Parties, and shall have no rights under this Section 12.4; provided that any
action taken pursuant to the second paragraph of this Section 12.4 shall not be
effective as against the Defaulting Holder.
12.5. HEADINGS, ETC.
The Table of Contents and headings of the various Articles and Sections
of this Agreement are for convenience of reference only and shall not modify,
define, expand or limit any of the terms or provisions hereof.
12.6. PARTIES IN INTEREST.
Except as expressly provided herein, none of the provisions of this
Agreement are intended for the benefit of any Person except the parties hereto.
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12.7. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL;
VENUE; ARBITRATION.
(a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA.
Any legal action or proceeding with respect to this Agreement or any
other Operative Agreement may be brought in the courts of the State of
North Carolina in New Hanover County or of the United States for the
Eastern District of North Carolina, and, by execution and delivery of
this Agreement, each of the parties to this Agreement hereby
irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the nonexclusive jurisdiction of such
courts. Each of the parties to this Agreement further irrevocably
consents to the service of process out of any of the aforementioned
courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to it at the
address set out for notices pursuant to Section 12.2, such service to
become effective three (3) days after such mailing. Nothing herein
shall affect the right of any party to serve process in any other
manner permitted by Law or to commence legal proceedings or to
otherwise proceed against any party in any other jurisdiction.
(b) EACH OF THE PARTIES HERETO IRREVOCABLY AND
UNCONDITIONALLY, TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW,
WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS
AGREEMENT, ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM
THEREIN.
(c) Each of the parties to this Agreement hereby irrevocably
waives any objection which it may now or hereafter have to the laying
of venue of any of the aforesaid actions or proceedings arising out of
or in connection with this Agreement or any other Operative Agreement
brought in the courts referred to in subsection (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such
court that any such action or proceeding brought in any such court has
been brought in an inconvenient forum.
(d) Notwithstanding the provisions of Section 12.7(a) or of
any other Operative Agreement to the contrary, upon demand of any party
to this Agreement and/or any other Operative Agreement, whether made
before or after institution of any judicial proceeding, any dispute,
claim or controversy arising out of, connected with or relating to this
Agreement and/or any other Operative Agreement between or among parties
to this Agreement and/or any other Operative Agreement ("Disputes")
shall be resolved by binding arbitration as provided herein.
Institution of a judicial proceeding by a party does not waive the
right of that party to demand arbitration hereunder. Disputes may
include without limitation tort claims, counterclaims, disputes as to
whether a matter is subject to arbitration, claims brought as class
actions, claims arising from agreements executed in
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the future, or claims arising out of or connected with the transaction
reflected by this Agreement and/or any other Operative Agreement.
Arbitration shall be conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration
Rules") of the American Arbitration Association (the "AAA") and Title 9
of the United States Code. All arbitration hearings shall be conducted
in Charlotte, North Carolina. The expedited procedures set forth in
Rule 51 et seq. of the Arbitration Rules shall be applicable to claims
of less than $1,000,000. All applicable statutes of limitation shall
apply to any Dispute. A judgment upon the award may be entered in any
court having jurisdiction. The panel from which all arbitrators are
selected shall be comprised of licensed attorneys. The single
arbitrator selected for expedited procedure shall be a retired judge
from the highest court of general jurisdiction, state or federal, of
the state where the hearing will be conducted or if such person is not
available to serve, the single arbitrator may be a licensed attorney.
Notwithstanding the foregoing, this arbitration provision does not
apply to disputes under or related to swap agreements.
Notwithstanding the immediately preceding binding arbitration
provisions, the parties to this Agreement and/or any other Operative
Agreement agree to preserve, without diminution, certain remedies that
the Agent on behalf of the Lenders and the Holders may employ or
exercise freely, independently or in connection with an arbitration
proceeding or after an arbitration action is brought. The Agent on
behalf of the Lenders and the Holders shall have the right to proceed
in any court of proper jurisdiction or by self-help to exercise or
prosecute the following remedies, as applicable (i) all rights to
foreclose against any real or personal property or other security by
exercising a power of sale granted under any Operative Agreement or
under applicable Law or by judicial foreclosure and sale, including
without limitation a proceeding to confirm the sale; (ii) all rights of
self-help including without limitation peaceful occupation of real
property and collection of rents, set-off and peaceful possession of
personal property; (iii) obtaining provisional or ancillary remedies
including without limitation injunctive relief, sequestration,
garnishment, attachment, appointment of receiver and filing an
involuntary bankruptcy proceeding; and (iv) when applicable, a judgment
by confession of judgment. Preservation of these remedies does not
limit the power of an arbitrator to grant similar remedies that may be
requested by a party in a Dispute.
The parties to this Agreement and/or any other Operative
Agreement agree that they shall not have a remedy of special, punitive
or exemplary damages against any other party in any Dispute and hereby
waive any right or claim to special, punitive or exemplary damages they
have now or which may arise in the future in connection with any
Dispute whether the Dispute is resolved by arbitration or judicially.
By execution and delivery of this Agreement and/or any other
Operative Agreement, each of the parties hereto and/or thereto accepts,
for itself and in connection with its properties, generally and
unconditionally, the non-exclusive jurisdiction relating
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to any arbitration proceedings conducted under the Arbitration Rules in
Charlotte, North Carolina and irrevocably agrees to be bound by any
final judgment rendered thereby in connection with this Agreement
and/or any other Operative Agreement from which no appeal has been
taken or is available.
12.8. SEVERABILITY.
Any provision of this Agreement that is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
12.9. LIABILITY LIMITED.
(a) The Lenders, the Agent, the Lessee, the Owner Trustee and
the Holders each acknowledge and agree that the Owner Trustee is
(except as otherwise expressly provided herein or therein) entering
into this Agreement and the other Operative Agreements to which it is a
party (other than the Trust Agreement and to the extent otherwise
provided in Section 6.1 of this Agreement), solely in its capacity as
trustee under the Trust Agreement and not in its individual capacity
and that the Trust Company shall not be liable or accountable under any
circumstances whatsoever in its individual capacity for or on account
of any statements, representations, warranties, covenants or
obligations stated to be those of the Owner Trustee, except for its own
gross negligence or willful misconduct and as otherwise expressly
provided herein or in the other Operative Agreements.
(b) Anything to the contrary contained in this Agreement, the
Credit Agreement, the Notes or in any other Operative Agreement
notwithstanding, no Exculpated Person shall be personally liable in any
respect for any liability or obligation arising hereunder or in any
other Operative Agreement including without limitation the payment of
the principal of, or interest on, the Notes, or for monetary damages
for the breach of performance of any of the covenants contained in the
Credit Agreement, the Notes, this Agreement, the Security Agreement or
any of the other Operative Agreements. The Lenders, the Holders and the
Agent agree that, in the event any remedies under any Operative
Agreement are pursued, neither the Lenders, the Holders nor the Agent
shall have any recourse against any Exculpated Person, for any
deficiency, loss or Claim for monetary damages or otherwise resulting
therefrom and recourse shall be had solely and exclusively against the
Trust Estate (excluding Excepted Payments) and the Lessee (with respect
to the Lessee's obligations under the Operative Agreements); but
nothing contained herein shall be taken to prevent recourse against or
the enforcement of remedies against the Trust Estate (excluding
Excepted Payments) in respect of any and all liabilities, obligations
and undertakings contained herein and/or in any other Operative
Agreement. Notwithstanding the provisions of this Section, nothing in
any Operative Agreement shall: (i) constitute a waiver, release or
discharge of any indebtedness or
54
<PAGE> 59
obligation evidenced by the Notes and/or the Certificates arising under
any Operative Agreement or secured by any Operative Agreement, but the
same shall continue until paid or discharged; (ii) relieve any
Exculpated Person from liability and responsibility for (but only to
the extent of the damages arising by reason of): active waste knowingly
committed by any Exculpated Person with respect to any Property, any
fraud, gross negligence or willful misconduct on the part of any
Exculpated Person; (iii) relieve any Exculpated Person from liability
and responsibility for (but only to the extent of the moneys
misappropriated, misapplied or not turned over) (A) except for Excepted
Payments, misappropriation or misapplication by the Lessor (i.e.,
application in a manner contrary to any of the Operative Agreements) of
any insurance proceeds or condemnation award paid or delivered to the
Lessor by any Person other than the Agent, (B) except for Excepted
Payments, any deposits or any escrows or amounts owed by the
Construction Agent under the Agency Agreement held by the Lessor or (C)
except for Excepted Payments, any rent or other income received by the
Lessor from the Lessee that is not turned over to the Agent; or (iv)
affect or in any way limit the Agent's rights and remedies under any
Operative Agreement with respect to the Rents and rights and powers of
the Agent under the Operative Agreements or to obtain a judgment
against the Lessee's interest in the Properties or the Agent's rights
and powers to obtain a judgment against the Lessor (provided, that no
deficiency judgment or other money judgment shall be enforced against
any Exculpated Person except to the extent of the Lessor's interest in
the Trust Estate (excluding Excepted Payments) or to the extent the
Lessor may be liable as otherwise contemplated in clauses (ii) and
(iii) of this Section 12.9(b)).
12.10. RIGHTS OF THE LESSEE.
If at any time all obligations (i) of the Owner Trustee under the
Credit Agreement, the Security Documents and the other Operative Agreements and
(ii) of the Lessee under the Operative Agreements have in each case been
satisfied or discharged in full, then the Lessee shall be entitled to (a)
terminate the Lease and (b) receive all amounts then held under the Operative
Agreements and all proceeds with respect to any of the Properties. Upon the
termination of the Lease pursuant to the foregoing clause (a), the Lessor shall
transfer to the Lessee all of its right, title and interest free and clear of
the Lien of the Lease, the Lien of the Security Documents and all Lessor Liens
in and to any Properties then subject to the Lease and any amounts or proceeds
referred to in the foregoing clause (b) shall be paid over to the Lessee.
12.11. FURTHER ASSURANCES.
The parties hereto shall promptly cause to be taken, executed,
acknowledged or delivered, at the sole expense of the Lessee, all such further
acts, conveyances, documents and assurances as the other parties may from time
to time reasonably request in order to carry out and effectuate the intent and
purposes of this Participation Agreement, the other Operative Agreements and the
transactions contemplated hereby and thereby (including without limitation the
preparation, execution and filing of any and all Uniform Commercial Code
financing statements, filings of Mortgage Instruments and other filings or
registrations which the parties hereto may from time to time request to be filed
or effected). The Lessee, at its own expense and without need of any
55
<PAGE> 60
prior request from any other party, shall take such action as may be necessary
(including without limitation any action specified in the preceding sentence),
or (if the Owner Trustee shall so request) as so requested, in order to maintain
and protect all security interests provided for hereunder or under any other
Operative Agreement. In addition, in connection with the sale or other
disposition of any Property or any portion thereof, the Lessee agrees to execute
such instruments of conveyance as may be reasonably required in connection
therewith.
12.12. CALCULATIONS UNDER OPERATIVE AGREEMENTS.
The parties hereto agree that all calculations and numerical
determinations to be made under the Operative Agreements by the Owner Trustee
shall be made by the Agent and that such calculations and determinations shall
be conclusive and binding on the parties hereto in the absence of manifest
error.
12.13. CONFIDENTIALITY.
Each Financing Party agrees to keep confidential any information
furnished or made available to it by the Lessee or any of its Subsidiaries
pursuant to this Agreement that is marked confidential; provided that nothing
herein shall prevent any Financing Party from disclosing such information (a) to
any other Financing Party or any Affiliate of any Financing Party, or any
officer, director, employee, agent, or advisor of any Financing Party or
Affiliate of any Financing Party, (b) to any other Person if reasonably
incidental to the administration of the credit facility provided herein, (c) as
required by any law, rule, or regulation, (d) upon the order of any court or
administrative agency, (e) upon the request or demand of any regulatory agency
or authority, (f) that is or becomes available to the public or that is or
becomes available to any Financing Party other than as a result of a disclosure
by any Financing Party prohibited by this Agreement, (g) in connection with any
litigation to which such Financing Party or any of its Affiliates may be a
party, (h) to the extent necessary in connection with the exercise of any remedy
under this Agreement or any other Operative Agreement, and (i) subject to
provisions substantially similar to those contained in this Section, to any
actual or proposed participant or assignee.
12.14. FINANCIAL REPORTING/TAX CHARACTERIZATION.
Lessee agrees to obtain advice from its own accountants and tax counsel
regarding the financial reporting treatment and the tax characterization of the
transactions described in the Operative Agreements. Lessee further agrees that
Lessee shall not rely upon any statement of any Financing Party or any of their
respective Affiliates and/or Subsidiaries regarding any such financial reporting
treatment and/or tax characterization.
12.15. SET-OFF.
In addition to any rights now or hereafter granted under applicable Law
and not by way of limitation of any such rights, upon and after the occurrence
of any Event of Default and during the continuance thereof, the Lenders, the
Holders, their respective Affiliates and any assignee or participant of a Lender
or a Holder in accordance with the applicable provisions of the Operative
56
<PAGE> 61
Agreements are hereby authorized by the Lessee at any time or from time to time,
without notice to the Lessee or to any other Person, any such notice being
hereby expressly waived, to set-off and to appropriate and to apply any and all
deposits (general or special, time or demand, including without limitation
indebtedness evidenced by certificates of deposit, whether matured or unmatured)
and any other indebtedness at any time held or owing by the Lenders, the
Holders, their respective Affiliates or any assignee or participant of a Lender
or a Holder in accordance with the applicable provisions of the Operative
Agreements to or for the credit or the account of the Lessee against and on
account of the obligations of the Lessee under the Operative Agreements
irrespective of whether or not (a) the Lenders or the Holders shall have made
any demand under any Operative Agreement or (b) the Agent shall have declared
any or all of the obligations of the Lessee under the Operative Agreements to be
due and payable and although such obligations shall be contingent or unmatured.
Notwithstanding the foregoing, neither the Agent nor any other Financing Party
shall exercise, or attempt to exercise, any right of setoff, banker's lien, or
the like, against any deposit account or property of the Lessee held by the
Agent or any other Financing Party, without the prior written consent of the
Majority Secured Parties, and any Financing Party violating this provision shall
indemnify the Agent and the other Financing Parties from any and all costs,
expenses, liabilities and damages resulting therefrom. The contractual
restriction on the exercise of setoff rights provided in the foregoing sentence
is solely for the benefit of the Agent and the Financing Parties and may not be
enforced by the Lessee.
[signature pages follow]
57
<PAGE> 62
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized as of the
day and year first above written.
CONSTRUCTION AGENT
AND LESSEE: APPLIED ANALYTICAL INDUSTRIES, INC., as
the Construction Agent and as the Lessee
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
OWNER TRUSTEE
AND LESSOR: FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not individually, except as
expressly stated herein, but solely as the
Owner Trustee under the AAI Realty Trust
1998-1
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
AGENT AND LENDERS: NATIONSBANK, N.A., as a Lender and as the
Agent
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
<PAGE> 63
HOLDERS: NATIONSBANK, N.A., as a Holder
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
<PAGE> 64
EXHIBIT A
REQUISITION FORM
(Pursuant to Sections 4.2, 5.2, 5.3 and 5.4 of the Participation Agreement)
APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation (the
"Company") hereby certifies as true and correct and delivers the following
Requisition to NationsBank, N.A., as the agent for the Lenders (hereinafter
defined) and respecting the Security Documents, as the agent for the Lenders and
the Holders (hereinafter defined), to the extent of their interests (the
"Agent"):
Reference is made herein to that certain Participation Agreement dated
as of __________, 1998 (as amended, modified, extended, supplemented, restated
and/or replaced from time to time, the "Participation Agreement") among the
Company, in its capacity as the Lessee and as the Construction Agent, First
Security Bank, National Association, as the Owner Trustee, the various banks and
other lending institutions which are parties thereto from time to time, as
holders (the "Holders"), the various banks and other lending institutions which
are parties thereto from time to time, as lenders (the "Lenders"), and the
Agent. Capitalized terms used herein but not otherwise defined herein shall have
the meanings set forth therefor in the Participation Agreement.
Check one:
____ INITIAL CLOSING DATE: _________________
(three (3) Business Days prior notice required for Advance)
____ PROPERTY CLOSING DATE:_________________
(three (3) Business Days prior notice required for Advance)
____ CONSTRUCTION ADVANCE DATE:_____________
(three (3) Business Days prior notice required for Advance)
1. Transaction Expenses and other fees, expenses and disbursements under
Sections 7.1(a) or 7.1(b) of the Participation Agreement and any and
all other amounts contemplated to be financed under the Participation
Agreement including without limitation any Work, broker's fees, taxes,
recording fees and the like (with supporting invoices or closing
statement attached):
Party to Whom Amount Owed
Amount is Owed (in U.S. Dollars)
-------------- --------------
-------------- --------------
-------------- --------------
-------------- --------------
-------------- --------------
A-1
<PAGE> 65
2. Description of Land (which shall be a legal description of the Land in
connection with an Advance to pay Property Acquisition Costs): See
attached Schedule 1
3. Description of Improvements: See attached Schedule 2
4. Description of Equipment: See attached Schedule 3
5. Description of Work: See attached Schedule 4
6. Aggregate Loans and Holder Advances requested since the Initial Closing
Date with respect to each Property for which Advances are requested
under this Requisition (listed on a Property by Property basis),
including without limitation all amounts requested under this
Requisition: [IDENTIFY ON A PROPERTY BY PROPERTY BASIS]
$______________ [Property]
In connection with this Requisition, the Company hereby requests that
the Lenders make Loans to the Lessor in the amount of $______________ and that
the Holders make Holder Advances to the Lessor in the amount of
$________________. The Company hereby certifies (i) that the foregoing amounts
requested do not exceed the total aggregate of the Available Commitments plus
the Available Holder Commitments and (ii) each of the provisions of the
Participation Agreement applicable to the Loans and Holder Advances requested
hereunder have been complied with as of the date of this Requisition.
The Company requests the Loans be allocated as follows:
$______________ ABR Loans
$______________ Eurodollar Loans
The Company requests the Holder Advances be allocated as follows:
$______________ ABR Holder Advances
$______________ Eurodollar Holder Advances
A-2
<PAGE> 66
The Company has caused this Requisition to the executed by its duly
authorized officer as of this _____ day of __________, ______.
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
_____________________________________
Name:
___________________________________
Title:
__________________________________
A-3
<PAGE> 67
Schedule 1
Description of Land
(Legal Description and Street Address)
A-4
<PAGE> 68
Schedule 2
Description of Improvements
A-5
<PAGE> 69
Schedule 3
Description of Equipment
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
General Description Make Model Serial Number
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
A-6
<PAGE> 70
Schedule 4
Work
Work Performed for which the Advance is requested:
--------------------------------------------------
--------------------------------------------------
A-7
<PAGE> 71
EXHIBIT B
[Outside Counsel Opinion for the Lessee]
(Pursuant to Section 5.3(j) of the
Participation Agreement)
____________, 1998
TO THOSE ON THE ATTACHED DISTRIBUTION LIST
Re: Synthetic Lease Financing Provided in favor of Applied
Analytical Industries, Inc.
Dear Sirs:
We have acted as special counsel to Applied Analytical Industries, Inc., a
Delaware corporation (the "Lessee") in connection with certain transactions
contemplated by the Participation Agreement dated as of __________, 1998 (the
"Participation Agreement"), among the Lessee, First Security Bank, National
Association, as the Owner Trustee (the "Owner Trustee"), the various banks and
other lending institutions which are parties thereto from time to time, as
holders (the "Holders"), the various banks and other lending institutions which
are parties thereto from time to time, as lenders (the "Lenders") and
NationsBank, N.A., as the agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and the Holders, to the extent of their
interests (the "Agent"). This opinion is delivered pursuant to Section 5.3(j) of
the Participation Agreement. All capitalized terms used herein, and not
otherwise defined herein, shall have the meanings assigned thereto in Appendix A
to the Participation Agreement.
In connection with the foregoing, we have examined originals, or copies
certified to our satisfaction, of [IDENTIFY THE APPLICABLE OPERATIVE AGREEMENTS,
INCLUDING EACH MORTGAGE INSTRUMENT, RELATED UCC FIXTURE FILINGS, ADDITIONAL UCCS
(HEREINAFTER DEFINED), DEEDS AND MEMORANDA OF LEASE] and such other corporate
documents and records of the Lessee, certificates of public officials and
representatives of the Lessee as to certain factual matters, and such other
instruments and documents which we have deemed necessary or advisable to examine
for the purpose of this opinion. With respect to such examination, we have
assumed (i) the statements of fact made in all such certificates, documents and
instruments are true, accurate and complete; (ii) the due authorization,
execution and delivery of the Operative Agreements by the parties thereto; (iii)
the genuineness of all signatures, the authenticity and completeness of all
documents, certificates, instruments, records and corporate records submitted to
us as originals and the conformity to the original instruments of all documents
submitted to us as copies, and the authenticity and completeness of the
originals of such copies; (iv) that all parties have all requisite corporate
power and authority to execute, deliver and perform the Operative
B-1
<PAGE> 72
Agreements; and (v) except as to the Lessee, the enforceability of the Mortgage
Instrument, the Memorandum of Lease and the UCC financing statements against all
parties thereto.
Based on the foregoing, and having due regard for such legal considerations as
we deem relevant, and subject to the limitations and assumptions set forth
herein, including without limitation the matters set forth in the last two (2)
paragraphs hereof, we are of the opinion that:
(a) The Mortgage Instrument and Memorandum of Lease are enforceable in
accordance with their respective terms, except as limited by laws generally
affecting the enforcement of creditors' rights, which laws will not materially
prevent the realization of the benefits intended by such documents.
(b) Each form of Mortgage Instrument and UCC fixture filing relating
thereto, attached hereto as Schedules 1 and 2, respectively, is in proper form
for filing and recording with the offices of [IDENTIFY THE RECORDING OFFICES OF
THE RESPECTIVE COUNTY CLERKS WHERE THE PROPERTIES ARE TO BE LOCATED]. Upon
filing of each Mortgage Instrument and UCC fixture filing in [IDENTIFY THE
RECORDING OFFICES OF THE RESPECTIVE COUNTY CLERKS WHERE THE PROPERTIES ARE TO BE
LOCATED], the Agent will have a valid, perfected lien and security interest in
that portion of the Collateral described in such Mortgage Instrument or UCC
fixture filing to the extent such Collateral is comprised of real property
and/or fixtures.
(c) The forms of UCC financing statements relating to the Security
Documents, attached hereto as Schedule 3 (the "Additional UCCs"), are in proper
form for filing and recording with the offices of [IDENTIFY (I) THE RECORDING
OFFICES OF THE RESPECTIVE COUNTY CLERKS WHERE THE PROPERTIES ARE TO BE LOCATED
AND (II) THE SECRETARY OF STATE WHERE THE PROPERTIES ARE TO BE LOCATED]. Upon
filing of the Additional UCCs in [IDENTIFY (I) THE RECORDING OFFICES OF THE
RESPECTIVE COUNTY CLERKS WHERE THE PROPERTIES ARE TO BE LOCATED AND (II) THE
SECRETARY OF STATE WHERE THE PROPERTIES ARE TO BE LOCATED], the Agent will have
a valid, perfected lien and security interest in that portion of the Collateral
which can be perfected by filing UCC-1 financing statements under Article 9 of
the UCC.
(d) Each form of Deed and Memorandum of Lease is in appropriate form
for filing and recording with the [IDENTIFY THE RECORDING OFFICES OF THE
RESPECTIVE COUNTY CLERKS FOR THE COUNTIES WHERE THE PROPERTIES ARE TO BE
LOCATED].
(e) Each Memorandum of Lease, when filed and recorded with the
[IDENTIFY THE RECORDING OFFICES OF THE RESPECTIVE COUNTY CLERKS FOR THE COUNTIES
WHERE THE PROPERTIES ARE TO BE LOCATED], will have been filed and recorded in
all public offices in the State of __________ in which filing or recording is
necessary to provide constructive notice of the Lease to third Persons and to
establish of record the interest of the Lessor thereunder as to the Properties
described in each such Memorandum of Lease.
B-2
<PAGE> 73
(f) Title to the Properties located in the State of ___________ may be
held in the name of the Owner Trustee as follows: First Security Bank, National
Association, not individually, but solely as the Owner Trustee under the AAI
Realty Trust 1998-1.
(g) The execution and delivery by First Security Bank, National
Association, individually or as the Owner Trustee, as the case may be, of the
Operative Agreements to which it is a party and compliance by First Security
Bank, National Association, individually or as the Owner Trustee, with all of
the provisions thereof do not and will not contravene any law, rule or
regulation of [IDENTIFY THE STATE].
(h) By reason of their participation in the transaction contemplated
under the Operative Agreements, none of the Agent, the Lenders, the Holders or
the Owner Trustee has to (a) qualify as a foreign corporation in [IDENTIFY THE
STATE], (b) file any application or any designation for service of process in
[IDENTIFY THE STATE] or (c) pay any franchise, income, sales, excise, stamp or
other taxes of any kind to [IDENTIFY THE STATE].
(i) The provisions in the Operative Agreements concerning Rent,
interest, fees, prepayment premiums and other similar charges do not violate the
usury laws or other similar laws regulating the use or forbearance of money of
[IDENTIFY THE STATE].
(j) If the transactions contemplated by the Operative Agreements are
characterized as a lease transaction by a court of competent jurisdiction, the
Lease and the applicable Lease Supplement shall demise to the Lessee a valid
leasehold interest in the Properties described in such Lease Supplement.
(k) If the transactions contemplated by the Operative Agreements are
characterized as a loan transaction by a court of competent jurisdiction, the
combination of the Mortgage Instruments, the Deeds, the Lease and the applicable
Lease Supplements (and the other Operative Agreements incorporated therein by
reference) are sufficient to create a valid, perfected lien or security interest
in the Properties therein described, enforceable as a mortgage in [IDENTIFY THE
STATE].
This opinion is limited to the matters stated herein and no opinion is implied
or may be inferred beyond the matters stated herein. This opinion is based on
and is limited to the laws of the State of ___________ and the federal laws of
the United States of America. Insofar as the foregoing opinion relates to
matters of law other than the foregoing, no opinion is hereby given.
B-3
<PAGE> 74
This opinion is for the sole benefit of the Lessee, the Construction Agent, the
Owner Trustee, the Holders, the Lenders, the Agent and their respective
successors and assigns and may not be relied upon by any other person other than
such parties and their respective successors and assigns without the express
written consent of the undersigned. The opinions expressed herein are as of the
date hereof and we make no undertaking to amend or supplement such opinions if
facts come to our attention or changes in the current law of the jurisdictions
mentioned herein occur which could affect such opinions.
Very truly yours,
[LESSEE'S OUTSIDE COUNSEL]
B-4
<PAGE> 75
Distribution List
NationsBank, N.A., as the Agent, a Holder and a Lender
The various banks and other lending institutions which are parties to the
Participation Agreement from time to time, as additional Holders
The various banks and other lending institutions which are parties to the
Participation Agreement from time to time, as additional Lenders
Applied Analytical Industries, Inc., as the Construction Agent and the Lessee
First Security Bank, National Association, not individually, but solely as the
Owner Trustee under the AAI Realty Trust 1998-1
B-5
<PAGE> 76
Schedule 1
Form of Mortgage Instrument
B-6
<PAGE> 77
Schedule 2
Forms of UCC Fixture Filings
B-7
<PAGE> 78
Schedule 3
Forms of UCC Financing Statements
B-8
<PAGE> 79
EXHIBIT C
APPLIED ANALYTICAL INDUSTRIES, INC.
OFFICER'S CERTIFICATE
(Pursuant to Section 5.3(z) of the Participation Agreement)
APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation (the
"Company"), DOES HEREBY CERTIFY as follows:
1. Each and every representation and warranty of the Company
contained in the Operative Agreements to which it is a party
is true and correct on and as of the date hereof.
2. No Default or Event of Default has occurred and is continuing
under any Operative Agreement.
3. Each Operative Agreement to which the Company is a party is in
full force and effect with respect to it.
4. The Company has duly performed and complied with all
covenants, agreements and conditions contained in the
Participation Agreement (hereinafter defined) or in any
Operative Agreement required to be performed or complied with
by it on or prior to the date hereof.
Capitalized terms used in this Officer's Certificate and not otherwise
defined herein have the respective meanings ascribed thereto in the
Participation Agreement dated as of __________, 1998 among the Company, as the
Lessee and as the Construction Agent, First Security Bank, National Association,
as the Owner Trustee, the various banks and other lending institutions which are
parties thereto from time to time, as holders (the "Holders"), the various banks
and other lending institutions which are parties thereto from time to time, as
lenders (the "Lenders") and NationsBank, N.A., as the agent for the Lenders and
respecting the Security Documents, as the agent for the Lenders and the Holders,
to the extent of their interests (the "Agent").
IN WITNESS WHEREOF, the Company has caused this Officer's Certificate
to be duly executed and delivered as of this _____ day of __________, 1998.
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
C-1
<PAGE> 80
EXHIBIT D
APPLIED ANALYTICAL INDUSTRIES, INC.
SECRETARY'S CERTIFICATE
(Pursuant to Section 5.3(aa) of the Participation Agreement)
APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation (the
"Company") DOES HEREBY CERTIFY as follows:
1. Attached hereto as Schedule 1 is a true, correct and complete
copy of the resolutions of the Board of Directors of the
Company duly adopted by the Board of Directors of the Company
on __________. Such resolutions have not been amended,
modified or rescinded since their date of adoption and remain
in full force and effect as of the date hereof.
2. Attached hereto as Schedule 2 is a true, correct and complete
copy of the Articles of Incorporation of the Company on file
in the Office of the Secretary of State of Delaware. Such
Articles of Incorporation have not been amended, modified or
rescinded since their date of adoption and remain in full
force and effect as of the date hereof.
3. Attached hereto as Schedule 3 is a true, correct and complete
copy of the Bylaws of the Company. Such Bylaws have not been
amended, modified or rescinded since their date of adoption
and remain in full force and effect as of the date hereof.
4. The persons named below now hold the offices set forth
opposite their names, and the signatures opposite their names
and titles are their true and correct signatures.
<TABLE>
<CAPTION>
Name Office Signature
---- ------ ---------
<S> <C> <C>
------------------- ----------------------- -------------------------
------------------- ----------------------- -------------------------
</TABLE>
D-1
<PAGE> 81
IN WITNESS WHEREOF, the Company has caused this Secretary's Certificate
to be duly executed and delivered as of this _____ day of ___________, 1998.
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
-------------------------------------
Name:
----------------------------------
Title:
----------------------------------
D-2
<PAGE> 82
Schedule 1
Board Resolutions
D-3
<PAGE> 83
Schedule 2
Articles of Incorporation
D-4
<PAGE> 84
Schedule 3
Bylaws
D-5
<PAGE> 85
EXHIBIT E
FIRST SECURITY BANK, NATIONAL ASSOCIATION
OFFICER'S CERTIFICATE
(Pursuant to Section 5.3(bb) of the Participation Agreement)
FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking
association, not individually (except with respect to paragraph 1 below, to the
extent any such representations and warranties are made in its individual
capacity) but solely as the owner trustee under the AAI Realty Trust 1998-1 (the
"Owner Trustee"), DOES HEREBY CERTIFY as follows:
1. Each and every representation and warranty of the Owner
Trustee contained in the Operative Agreements to which it is a
party is true and correct on and as of the date hereof.
2. Each Operative Agreement to which the Owner Trustee is a party
is in full force and effect with respect to it.
3. The Owner Trustee has duly performed and complied with all
covenants, agreements and conditions contained in the
Participation Agreement (hereinafter defined) or in any
Operative Agreement required to be performed or complied with
by it on or prior to the date hereof.
Capitalized terms used in this Officer's Certificate and not otherwise
defined herein have the respective meanings ascribed thereto in the
Participation Agreement dated as of __________, 1998 among Applied Analytical
Industries, Inc., as the Lessee and as the Construction Agent, the Owner
Trustee, the various banks and other lending institutions which are parties
thereto from time to time, as holders (the "Holders"), the various banks and
other lending institutions which are parties thereto from time to time, as
lenders (the "Lenders") and NationsBank, N.A., as the agent for the Lenders and
respecting the Security Documents, as the agent for the Lenders and the Holders,
to the extent of their interests (the "Agent").
E-1
<PAGE> 86
IN WITNESS WHEREOF, the Owner Trustee has caused this Officer's
Certificate to be duly executed and delivered as of this _____ day of
__________, 1998.
FIRST SECURITY BANK, NATIONAL ASSOCIATION,
not individually, except as expressly stated
herein, but solely as the Owner Trustee
under the AAI Realty Trust 1998-1
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
E-2
<PAGE> 87
EXHIBIT F
FIRST SECURITY BANK, NATIONAL ASSOCIATION
SECRETARY'S CERTIFICATE
(Pursuant to Section 5.3(cc) of the Participation Agreement)
CERTIFICATE OF ASSISTANT SECRETARY
I, ______________________, duly elected and qualified Assistant
Secretary of the Board of Directors of First Security Bank, National Association
(the "Association"), hereby certify as follows:
1. The Association is a National Banking Association duly organized,
validly existing and in good standing under the laws of the United States. With
respect thereto the following is noted:
A. Pursuant to Revised Statutes 324, et seq., as amended, 12
U.S.C. 1, et seq., the Comptroller of the Currency charters
and exercises regulatory and supervisory authority over all
National Banking Associations;
B. On December 9, 1881, the First National Bank of Ogden, Utah
was chartered as a National Banking Association under the laws
of the United States and under Charter No. 2597;
C. On October 2, 1922, in connection with a consolidation of The
First National Bank of Ogden, Ogden, Utah, and The Utah
National Bank of Ogden, Ogden, Utah, the title was changed to
"The First & Utah National Bank of Ogden"; on January 18,
1923, The First & Utah National Bank of Ogden changed its
title to "First Utah National Bank of Ogden"; on January 19,
1926, the title was changed to "First National Bank of Ogden";
on February 24, 1934, the title was changed to "First Security
Bank of Utah, National Association"; on June 21, 1996, the
title was changed to "First Security Bank, National
Association"; and
D. First Security Bank, National Association, Ogden, Utah,
continues to hold a valid certificate to do business as a
National Banking Association.
2. The Association's Articles of Association, as amended, are in full
force and effect, and a true, correct and complete copy is attached hereto as
Schedule A and incorporated herein by reference. Said Articles were last amended
October 20, 1975, as required by law on notice at a duly called special meeting
of the shareholders of the Association.
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3. The Association's By-Laws, as amended, are in full force and effect;
and a true, correct and complete copy is attached hereto as Schedule B and
incorporated herein by reference. Said By-Laws, still in full force and effect,
were adopted September 17, 1942, by resolution, after proper notice of
consideration and adoption of By-Laws was given to each and every shareholder,
at a regularly called meeting of the Board of Directors with a quorum present.
4. Pursuant to the authority vested in it by an Act of Congress
approved December 23, 1913 and known as the Federal Reserve Act, as amended, the
Federal Reserve Board (now the Board of Governors of the Federal Reserve System)
has granted to the Association now known as "First Security Bank, National
Association" of Ogden, Utah, the right to act, when not in contravention of
State or local law, as trustee, executor, administrator, registrar of stocks and
bonds, guardian of estates, assignee, receiver, committee of estates of
lunatics, or in any other fiduciary capacity in which State banks, trust
companies or other corporations which come into competition with National Banks
are permitted to act under the laws of the State of Utah; and under the
provisions of applicable law, the authority so granted remains in full force and
effect.
5. Pursuant to authority vested by Act of Congress (12 U.S.C. 92a and
12 U.S.C. 481, as amended) the Comptroller of the Currency has issued Regulation
9, as amended, dealing, in part, with the Fiduciary Powers of National Banks,
said regulation providing in subparagraph 9.7 (a) (1-2):
(1) The board of directors is responsible for the proper exercise
of fiduciary powers by the Bank. All matters pertinent
thereto, including the determination of policies, the
investment and disposition of property held in fiduciary
capacity, and the direction and review of the actions of all
officers, employees, and committees utilized by the Bank in
the exercise of its fiduciary powers, are the responsibility
of the board. In discharging this responsibility, the board of
directors may assign, by action duly entered in the minutes,
the administration of such of the Bank's fiduciary powers as
it may consider proper to assign to such director(s),
officer(s), employee(s) or committee(s) as it may designate.
(2) No fiduciary account shall be accepted without the prior
approval of the board, or of the director(s), officer(s), or
committee(s) to whom the board may have designated the
performance of that responsibility. . . .
6. A Resolution relating to Exercise of Fiduciary Powers was adopted by
the Board of Directors at a meeting held July 26, 1994 at which time there was a
quorum present; said resolution is still in full force and effect and has not
been rescinded. Said resolution is attached hereto as Schedule C and
incorporated herein by reference.
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7. A Resolution relating to the Designation of Officers and Employees
to Exercise Fiduciary Powers was adopted by the Trust Policy Committee at a
meeting held February 7, 1996 at which time a quorum was present; said
resolution is still in full force and effect and has not been rescinded. Said
resolution is attached hereto as Schedule D and is incorporated herein by
reference.
8. Attached hereto as Schedule E and incorporated herein by reference,
is a listing of facsimile signatures of persons authorized (herein "Authorized
Signatory or Signatories") on behalf of the Association and its Trust Group to
act in exercise of its fiduciary powers subject to the resolutions in Paragraphs
6 and 7, above.
9. The principal office of the First Security Bank, National
Association, Trust Group and of its departments, except for the St. George,
Utah, Ogden, Utah, and Provo, Utah, branch offices, is located at 79 South Main
Street, Salt Lake City, Utah 84111 and all records relating to fiduciary
accounts are located at such principal office of the Trust Group or in storage
facilities within Salt Lake County, Utah, except for those of the Ogden, Utah,
St. George, Utah, and Provo, Utah, branch offices, which are located at said
office.
10. Each Authorized Signatory (i) is a duly elected or appointed, duly
qualified officer or employee of the Association; (ii) holds the office or job
title set forth below his or her name on the date hereof; (iii) and the
facsimile signature appearing opposite the name of each such officer or employee
is a true replica of his or her signature.
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IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of
the Association this __________ day of _________________, 1998.
(SEAL)
----------------------------------------
R. James Steenblik
Senior Vice President
Assistant Secretary
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Schedule A
Articles of Association
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Schedule B
Bylaws
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Schedule C
Resolution Relating to
Exercise of Fiduciary Powers
F-7
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Schedule D
Resolution Relating to the
Designation of Officers and Employees
To Exercise Fiduciary Powers
F-8
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Schedule E
Authorized Signatory or Signatories
F-9
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EXHIBIT G
[Outside Counsel Opinion for the Owner Trustee]
(Pursuant to Section 5.3(dd) of the
Participation Agreement)
___________, 1998
TO THOSE ON THE ATTACHED DISTRIBUTION LIST
Re: Trust Agreement dated as of __________, 1998
Dear Sirs:
We have acted as special counsel for First Security Bank, National
Association, a national banking association, in its individual capacity ("FSB")
and in its capacity as trustee (the "Owner Trustee") under the Trust Agreement
dated as of __________, 1998 (the "Trust Agreement") by and among it and the
various banks and other lending institutions which are parties thereto from time
to time, as holders (the "Holders"), in connection with the execution and
delivery by the Owner Trustee of the Operative Agreements to which it is a
party. Except as otherwise defined herein, the terms used herein shall have the
meanings set forth in Appendix A to the Participation Agreement dated as of
__________, 1998 (the "Participation Agreement") by and among Applied Analytical
Industries, Inc. (the "Lessee"), First Security Bank, National Association, as
the Owner Trustee, the Holders, the various banks and other lending institutions
which are parties thereto from time to time, as lenders (the "Lenders") and
NationsBank, N.A., as the agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and the Holders, to the extent of their
interests (the "Agent").
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records and other instruments
as we have deemed necessary or advisable for the purpose of rendering this
opinion.
Based upon the foregoing, we are of the opinion that:
1. FSB is a national banking association duly organized, validly
existing and in good standing under the laws of the United States of America and
each of FSB and the Owner Trustee has under the laws of the State of Utah and
federal banking law the power and authority to enter into and perform its
obligations under the Trust Agreement and each other Operative Agreement to
which it is a party.
2. The Owner Trustee is the duly appointed trustee under the Trust
Agreement.
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3. The Trust Agreement has been duly authorized, executed and delivered
by one (1) of the officers of FSB and, assuming due authorization, execution and
delivery by the Holders, is a legal, valid and binding obligation of the Owner
Trustee (and to the extent set forth therein, against FSB), enforceable against
the Owner Trustee (and to the extent set forth therein, against FSB) in
accordance with its terms, and the Trust Agreement creates under the laws of the
State of Utah for the Holders the beneficial interest in the Trust Estate it
purports to create and is a valid trust under the laws of the State of Utah.
4. The Operative Agreements to which it is party have been duly
authorized, executed and delivered by FSB, and, assuming due authorization,
execution and delivery by the other parties thereto, are legal, valid and
binding obligations of FSB, enforceable against FSB in accordance with their
respective terms.
5. The Operative Agreements to which it is party have been duly
authorized, executed and delivered by the Owner Trustee, and, assuming due
authorization, execution and delivery by the other parties thereto, are legal,
valid and binding obligations of the Owner Trustee, enforceable against the
Owner Trustee in accordance with their respective terms. The Notes and
Certificates have been duly issued, executed and delivered by the Owner Trustee,
pursuant to authorization contained in the Trust Agreement, and the Certificates
are entitled to the benefits and security afforded by the Trust Agreement in
accordance with its terms and the terms of the Trust Agreement.
6. The execution and delivery by each of FSB and the Owner Trustee of
the Trust Agreement and the Operative Agreements to which it is a party, and
compliance by FSB or the Owner Trustee, as the case may be, with all of the
provisions thereof do not and will not contravene any Laws applicable to or
binding on FSB, or as the Owner Trustee, or contravene the provisions of, or
constitute a default under, its charter documents or by-laws or, to our
knowledge after due inquiry, any indenture, mortgage contract or other agreement
or instrument to which FSB or Owner Trustee is a party or by which it or any of
its property may be bound or affected.
7. The execution and delivery of the Operative Agreements by each of
FSB and the Owner Trustee and the performance by each of FSB and the Owner
Trustee of their respective obligations thereunder does not require on or prior
to the date hereof the consent or approval of, the giving of notice to, the
registration or filing with, or the taking of any action in respect of any
Governmental Authority or any court.
8. Assuming that the trust created by the Trust Agreement is treated as
a grantor trust for federal income tax purposes within the contemplation of
Section 671 through 678 of the Internal Revenue Code of 1986, there are no fees,
taxes, or other charges (except taxes imposed on fees payable to the Owner
Trustee) payable to the State of Utah or any political subdivision thereof in
connection with the execution, delivery or performance by the Owner Trustee, the
Agent, the Lenders, the Lessee or the Holders, as the case may be, of the
Operative Agreements or in connection with the acquisition of any Property by
the Owner Trustee or in connection with the making by any Holder of its
investment in the Trust or its acquisition of the beneficial
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interest in the Trust Estate or in connection with the issuance and acquisition
of the Certificates, or the Notes, and neither the Owner Trustee, the Trust
Estate nor the trust created by the Trust Agreement will be subject to any fee,
tax or other governmental charge (except taxes on fees payable to the Owner
Trustee) under the laws of the State of Utah or any political subdivision
thereof on, based on or measured by, directly or indirectly, the gross receipts,
net income or value of the Trust Estate by reason of the creation or continued
existence of the trust under the terms of the Trust Agreement pursuant to the
laws of the State of Utah or the Owner Trustee's performance of its duties under
the Trust Agreement.
9. There is no fee, tax or other governmental charge under the laws of
the State of Utah or any political subdivision thereof in existence on the date
hereof on, based on or measured by any payments under the Certificates, Notes or
the beneficial interest in the Trust Estate, by reason of the creation of the
trust under the Trust Agreement pursuant to the laws of the State of Utah or the
Owner Trustee's performance of its duties under the Trust Agreement within the
State of Utah.
10. Upon the filing of the financing statement on form UCC-1 in the
form attached hereto as Schedule 1 with the Utah Division of Corporation and
Commercial Code, the Agent's security interest in the Trust Estate, for the
benefit of the Lenders and the Holders, will be perfected, to the extent that
such perfection is governed by Article 9 of the Uniform Commercial Code as in
effect in the State of Utah (the "Utah UCC").
Your attention is directed to the Utah UCC, which provides, in part,
that a filed financing statement which does not state a maturity date or which
states a maturity date of more than five (5) years is effective only for a
period of five (5) years from the date of filing, unless within six (6) months
prior to the expiration of said period a continuation statement is filed in the
same office or offices in which the original statement was filed. The
continuation statement must be signed by the secured party, identify the
original statement by file number and state that the original statement is still
effective. Upon the timely filing of a continuation statement, the effectiveness
of the original financing statement is continued for five (5) years after the
last date to which the original statement was effective. Succeeding continuation
statements may be filed in the same manner to continue the effectiveness of the
original statement.
The foregoing opinions are subject to the following assumptions, exceptions and
qualifications:
A. We are attorneys admitted to practice in the State of Utah and in
rendering the foregoing opinions we have not passed upon, or purported to pass
upon, the laws of any jurisdictions other than the State of Utah and the federal
banking law governing the banking and trust powers of FSB. In addition, without
limiting the foregoing we express no opinion with respect to (i) federal
securities laws, including the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and the Trust Indenture Act of
1939, as amended, (ii) the Federal Aviation Act of 1958, as amended, (iii) the
Federal Communications Act of 1934, as amended, or (iv) state securities or blue
sky laws. Insofar as the foregoing opinions relate to the legality, validity,
binding effect and enforceability of the documents involved in these
transactions, which by their terms are governed by the laws of a state other
than Utah, we have
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assumed that the laws of such state (as to which we express no opinion), are in
all material aspects identical to the laws of the State of Utah.
B. The opinions set forth in paragraphs 3, 4, and 5 above are subject
to the qualification that enforceability of the Trust Agreement and the other
Operative Agreements to which FSB and the Owner Trustee are parties, in
accordance with their respective terms, may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, receivership or similar laws affecting
enforcement of creditors' rights generally, and (ii) general principles of
equity, regardless of whether such enforceability is considered in a proceeding
in equity or at law.
C. As to the documents involved in these transactions, we have assumed
that each is a legal, valid and binding obligation of each party thereto, other
than FSB or the Owner Trustee, and is enforceable against each such party in
accordance with their respective terms.
D. We have assumed that all signatures, other than those of the Owner
Trustee or FSB, on documents and instruments involved in these transactions are
genuine, that all documents and instruments submitted to us as originals are
authentic, and that all documents and instruments submitted to us as copies
conform with the originals, which facts we have not independently verified.
E. We do not purport to be experts in respect of, or express any
opinion concerning laws, rules or regulations applicable to the particular
nature of the equipment or property involved in these transactions.
F. We have made no investigation of, and we express no opinion
concerning, the nature of the title to any part of the equipment or property
involved in these transactions or the priority of any mortgage or security
interest.
G. We have assumed that the Participation Agreement and the
transactions contemplated thereby are not within the prohibitions of Section 406
of the Employee Retirement Income Security Act of 1974.
H. In addition to any other limitation by operation of law upon the
scope, meaning, or purpose of this opinion, the opinions expressed herein speak
only as of the date hereof. We have no obligation to advise the recipients of
this opinion (or any third party) and make no undertaking to amend or supplement
such opinions if facts come to our attention or changes in the current law of
the jurisdictions mentioned herein occur which could affect such opinions the
legal analysis, a legal conclusion or any information confirmation herein.
I. This opinion is for the sole benefit of the Lessee, the Construction
Agent, the Owner Trustee, the Holders, the Lenders, the Agent and their
respective successors and assigns in matters directly related to the
Participation Agreement or the transaction contemplated thereunder and may not
be relied upon by any other person other than such parties and their respective
successors and assigns without the express written consent of the undersigned.
The
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opinions expressed in this letter are limited to the matter set forth in
this letter, and no other opinions should be inferred beyond the matters
expressly stated.
Very truly yours,
RAY, QUINNEY & NEBEKER
M. John Ashton
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Distribution List
NationsBank, N.A., as the Agent, a Holder and a Lender
The various banks and other lending institutions which are parties to the
Participation Agreement from time to time, as additional Holders
The various banks and other lending institutions which are parties to the
Participation Agreement from time to time, as additional Lenders
Applied Analytical Industries, Inc., as the Construction Agent and the Lessee
First Security Bank, National Association, not individually, but solely as the
Owner Trustee under the AAI Realty Trust 1998-1
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EXHIBIT H
[Outside Counsel Opinion for the Lessee]
(Pursuant to Section 5.3(ee) of the Participation Agreement)
____________, 1998
TO THOSE ON THE ATTACHED DISTRIBUTION LIST
Re: Synthetic Lease Financing Provided in favor of Applied
Analytical Industries, Inc.
Dear Sirs:
We have acted as special counsel to Applied Analytical Industries, Inc., a
Delaware corporation (the "Lessee") in connection with certain transactions
contemplated by the Participation Agreement dated as of __________, 1998 (the
"Participation Agreement"), among the Lessee, First Security Bank, National
Association, as the Owner Trustee (the "Owner Trustee"), the various banks and
other lending institutions which are parties thereto from time to time, as
holders (the "Holders"), the various banks and other lending institutions which
are parties thereto from time to time, as lenders (the "Lenders") and
NationsBank, N.A., as the agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and the Holders, to the extent of their
interests (the "Agent"). This opinion is delivered pursuant to Section 5.3(ee)
of the Participation Agreement. All capitalized terms used herein, and not
otherwise defined herein, shall have the meanings assigned thereto in Appendix A
to the Participation Agreement.
In connection with the foregoing, we have examined originals, or copies
certified to our satisfaction, of the Operative Agreements, and such other
corporate, partnership or limited liability company documents and records of the
Lessee, certificates of public officials and representatives of the Lessee as to
certain factual matters, and such other instruments and documents which we have
deemed necessary or advisable to examine for the purpose of this opinion. With
respect to such examination, we have assumed (i) the statements of fact made in
all such certificates, documents and instruments are true, accurate and
complete; (ii) the due authorization, execution and delivery of the Operative
Agreements by the parties thereto other than the Lessee; (iii) the genuineness
of all signatures (other than the signatures of persons signing on behalf of the
Lessee), the authenticity and completeness of all documents, certificates,
instruments, records and corporate records submitted to us as originals and the
conformity to the original instruments of all documents submitted to us as
copies, and the authenticity and completeness of the originals of such copies;
(iv) that all parties other than the Lessee have all requisite corporate power
and authority to execute, deliver and perform the Operative Agreements; and (v)
the enforceability of the Operative Agreements against all parties thereto
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other than the Lessee and respecting the opinion set forth below in section (i),
First Security Bank, National Association, individually or as the Owner Trustee,
as the case may be. We have further assumed that the laws of the States of
[STATE OF LAWYER'S ADMISSION] and [GOVERNING LAW OF PARTICIPATION AGREEMENT] are
substantively identical.
Based on the foregoing, and having due regard for such legal considerations as
we deem relevant, and subject to the limitations and assumptions set forth
herein, including without limitation the matters set forth in the last two (2)
paragraphs hereof, we are of the opinion that:
(a) The Lessee is a [CORPORATION, PARTNERSHIP OR LIMITED LIABILITY
COMPANY] duly [INCORPORATED OR ORGANIZED], validly existing and in good standing
under the laws of Delaware and has the power and authority to conduct its
business as presently conducted and to execute, deliver and perform its
obligations under the Operative Agreements to which it is a party. The Lessee is
duly qualified to do business in all jurisdictions in which its failure to so
qualify would materially impair its ability to perform its obligations under the
Operative Agreements to which it is a party or its financial position or its
business as now and now proposed to be conducted.
(b) The execution, delivery and performance by the Lessee of the
Operative Agreements to which it is a party have been duly authorized by all
necessary corporate action on the part of the Lessee and the Operative
Agreements to which the Lessee is a party have been duly executed and delivered
by the Lessee.
(c) The Operative Agreements to which the Lessee is a party constitute
valid and binding obligations of the Lessee enforceable against the Lessee in
accordance with the terms thereof, subject to bankruptcy, insolvency,
liquidation, reorganization, fraudulent conveyance, and similar laws affecting
creditors' rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a proceeding in
equity or at law).
(d) The execution and delivery by the Lessee of the Operative
Agreements to which it is a party and compliance by the Lessee with all of the
provisions thereof do not and will not (i) contravene the provisions of, or
result in any breach of or constitute any default under, or result in the
creation of any Lien (other than Permitted Liens and Lessor Liens) upon any of
its property under, its [ARTICLES OF INCORPORATION, BY-LAWS, OPERATING
AGREEMENT, PARTNERSHIP AGREEMENT OR OTHER SIMILAR DOCUMENT OF FORMATION] or any
indenture, mortgage, chattel mortgage, deed of trust, lease, conditional sales
contract, bank loan or credit agreement or other agreement or instrument to
which the Lessee is a party or by which it or any of its property may be bound
or affected, or (ii) contravene any Laws or any order of any Governmental
Authority applicable to or binding on the Lessee.
(e) No Governmental Action by, and no notice to or filing with, any
Governmental Authority is required for the due execution, delivery or
performance by the Lessee of any of the Operative Agreements to which it is a
party or for the acquisition, ownership, construction and completion of the
Properties, except for those which have been obtained.
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(f) Except as set forth on Schedule 1 hereto, there are no actions,
suits or proceedings pending or to our knowledge, threatened against the Lessee
in any court or before any Governmental Authority, that concern the Properties
or the Lessee's interest therein or that question the validity or enforceability
of any Operative Agreement to which the Lessee is a party or the overall
transaction described in the Operative Agreements to which the Lessee is a
party.
(g) Neither the nature of the Properties, nor any relationship between
the Lessee and any other Person, nor any circumstance in connection with the
execution, delivery and performance of the Operative Agreements to which the
Lessee is a party is such as to require any approval of stockholders of, or
approval or consent of any trustee or holders of indebtedness of, the Lessee,
except for such approvals and consents which have been duly obtained and are in
full force and effect.
(h) The Security Documents which have been executed and delivered as of
the date of this opinion create, for the benefit of the Agent, the security
interests in the Collateral described therein which by their terms such Security
Documents purport to create. Upon filing of the UCC-1 financing statements
(attached hereto as Schedule 2) relating to the Security Documents in the
recording offices of (A) the respective county clerk where the principal place
of business of the Lessee is located and (B) the Secretary of State where the
principal place of business of the Lessee is located, the Agent will have a
valid, perfected lien and security interest in that portion of the Collateral
which can be perfected by the filing of UCC-1 financing statements under Article
9 of the UCC in [IDENTIFY THE STATE].
(i) The Operative Agreements to which First Security Bank, National
Association, individually or as the Owner Trustee, is a party constitute valid
and binding obligations of such party and are enforceable against First Security
Bank, National Association, individually or as the Owner Trustee, as the case
may be, in accordance with the terms thereof, subject to bankruptcy, insolvency,
liquidation, reorganization, fraudulent conveyance, and similar laws affecting
creditors, rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a proceeding in
equity or at law).
(j) The issuance, sale and delivery of the Notes and the issuance and
delivery of the Certificates under the circumstances contemplated by the
Participation Agreement do not, under existing law, require registration of the
Notes or the Certificates being issued on the date hereof under the Securities
Act of 1933, as amended, or the qualification of the Loan Agreement under the
Trust Indenture Act of 1939, as amended.
This opinion is limited to the matters stated herein and no opinion is implied
or may be inferred beyond the matters stated herein. This opinion is based on
and is limited to the laws of the States of __________, and the federal laws of
the United States of America. Insofar as the foregoing opinion relates to
matters of law other than the foregoing, no opinion is hereby given.
This opinion is for the sole benefit of the Lessee, the Construction Agent, the
Owner Trustee, the Holders, the Lenders, the Agent and their respective
successors and assigns and may not be relied upon by any other person other than
such parties and their respective successors and assigns
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without the express written consent of the undersigned. The opinions expressed
herein are as of the date hereof and we make no undertaking to amend or
supplement such opinions if facts come to our attention or changes in the
current law of the jurisdictions mentioned herein occur which could affect such
opinions.
Very truly yours,
[LESSEE'S OUTSIDE COUNSEL]
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Distribution List
NationsBank, N.A., as the Agent, a Holder and a Lender
The various banks and other lending institutions which are parties to the
Participation Agreement from time to time, as additional Holders
The various banks and other lending institutions which are parties to the
Participation Agreement from time to time, as additional Lenders
Applied Analytical Industries, Inc., as the Construction Agent and the Lessee
First Security Bank, National Association, not individually, but solely as the
Owner Trustee under the AAI Realty Trust 1998-1
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Schedule 1
(Litigation)
H-6
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Schedule 2
(UCC-1 Financing Statements)
H-7
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EXHIBIT I
APPLIED ANALYTICAL INDUSTRIES, INC.
OFFICER'S CERTIFICATE
(Pursuant to Section 5.5 of the Participation Agreement)
APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation (the
"Company") DOES HEREBY CERTIFY as follows:
1. The address for the subject Property is_______________________________
________________________________.
2. The Completion Date for the construction of Improvements at the
Property occurred on ______________.
3. The aggregate Property Cost for the Property was $___________.
4. Attached hereto as Schedule 1 is the detailed, itemized documentation
supporting the asserted Property Cost figures.
5. All representations and warranties of the Company in each Operative
Agreement and in each certificate delivered pursuant thereto (including
without limitation the Incorporated Representations and Warranties) are
true and correct as of the Completion Date.
Capitalized terms used in this Officer's Certificate and not otherwise defined
have the respective meanings ascribed thereto in the Participation Agreement
dated as of __________, 1998 among the Company, as the Lessee and as the
Construction Agent, First Security Bank, National Association, as the Owner
Trustee, the various banks and other lending institutions which are parties
thereto from time to time, as holders (the "Holders"), the various banks and
other lending institutions which are parties thereto from time to time, as
lenders (the "Lenders"), NationsBank, N.A., as the agent for the Lenders and
respecting the Security Documents, as the agent for the Lenders and the Holders,
to the extent of their interests.
[The remainder of this page has been intentionally left blank.]
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<PAGE> 110
IN WITNESS WHEREOF, the Company has caused this Officer's Certificate
to be duly executed and delivered as of this ____ day of ______________, 1998.
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
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<PAGE> 111
Schedule I
(Itemized Documentation in Support of Asserted Property Cost)
I-3
<PAGE> 112
EXHIBIT J
[Description of Material Litigation]
(Pursuant to Section 6.2(d) of the Participation Agreement)
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- -------------------------------------------------------------------------------
Appendix A
Rules of Usage and Definitions
- -------------------------------------------------------------------------------
I. Rules of Usage
The following rules of usage shall apply to this Appendix A and the Operative
Agreements (and each appendix, schedule, exhibit and annex to the foregoing)
unless otherwise required by the context or unless otherwise defined therein:
(a) Except as otherwise expressly provided, any definitions set forth
herein or in any other document shall be equally applicable to the singular and
plural forms of the terms defined.
(b) Except as otherwise expressly provided, references in any document
to articles, sections, paragraphs, clauses, annexes, appendices, schedules or
exhibits are references to articles, sections, paragraphs, clauses, annexes,
appendices, schedules or exhibits in or to such document.
(c) The headings, subheadings and table of contents used in any
document are solely for convenience of reference and shall not constitute a part
of any such document nor shall they affect the meaning, construction or effect
of any provision thereof.
(d) References to any Person shall include such Person, its successors,
permitted assigns and permitted transferees.
(e) Except as otherwise expressly provided, reference to any agreement
means such agreement as amended, modified, extended, supplemented, restated
and/or replaced from time to time in accordance with the applicable provisions
thereof.
(f) Except as otherwise expressly provided, references to any law
includes any amendment or modification to such law and any rules or regulations
issued thereunder or any law enacted in substitution or replacement therefor.
(g) When used in any document, words such as "hereunder", "hereto",
"hereof" and "herein" and other words of like import shall, unless the context
clearly indicates to the contrary, refer to the whole of the applicable document
and not to any particular article, section, subsection, paragraph or clause
thereof.
(h) References to "including" means including without limiting the
generality of any description preceding such term and for purposes hereof the
rule of ejusdem generis shall not be
<PAGE> 114
applicable to limit a general statement, followed by or referable to an
enumeration of specific matters, to matters similar to those specifically
mentioned.
(i) References herein to "attorney's fees", "legal fees", "costs of
counsel" or other such references shall be deemed to include the allocated cost
of in-house counsel.
(j) Each of the parties to the Operative Agreements and their counsel
have reviewed and revised, or requested revisions to, the Operative Agreements,
and the usual rule of construction that any ambiguities are to be resolved
against the drafting party shall be inapplicable in the construing and
interpretation of the Operative Agreements and any amendments or exhibits
thereto.
(k) Capitalized terms used in any Operative Agreements which are not
defined in this Appendix A but are defined in another Operative Agreement shall
have the meaning so ascribed to such term in the applicable Operative Agreement.
II. Definitions
"AAA" shall have the meaning given to such term in Section 12.7(d) of
the Participation Agreement.
"AAI" shall mean Applied Analytical Industries, Inc., a Delaware
corporation, and its successors and permitted assigns.
"AAI Realty Trust 1998-1" shall mean the grantor trust created pursuant
to the terms and conditions of the Trust Agreement.
"ABR" shall mean, for any day, a rate per annum equal to the greater of
(a) the Prime Lending Rate in effect on such day, and (b) the Federal Funds
Effective Rate in effect on such day plus one-half of one percent (0.5%). For
purposes hereof: "Prime Lending Rate" shall mean the rate which the Agent
announces from time to time as its prime lending rate as in effect from time to
time. The Prime Lending Rate is a reference rate and does not necessarily
represent the lowest or best rate actually charged to any customer. Any Lender
may make commercial loans or other loans at rates of interest at, above or below
the Prime Lending Rate. The Prime Lending Rate shall change automatically and
without notice from time to time as and when the prime lending rate of the Agent
changes. "Federal Funds Effective Rate" shall mean, for any period, a
fluctuating interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions with
members or the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for such day on such transactions received by the Agent from three
(3) Federal funds brokers of recognized standing selected by it. Any change in
the ABR due to a change in the Prime Lending Rate or the Federal Funds Effective
Rate shall be effective as of the opening of business
Appendix A-2
<PAGE> 115
on the effective day of such change in the Prime Lending Rate or the Federal
Funds Effective Rate, respectively.
"ABR Holder Advance" shall mean a Holder Advance bearing a Holder Yield
based on the ABR.
"ABR Loans" shall mean Loans the rate of interest applicable to which
is based upon the ABR.
"Acceleration" shall have the meaning given to such term in Section 6
of the Credit Agreement.
"Accounts" shall have the meaning given to such term in Section 1 of
the Security Agreement.
"Acquisition Advance" shall have the meaning given to such term in
Section 5.3 of the Participation Agreement.
"Acquisition Loan" shall mean any Loan made in connection with an
Acquisition Advance.
"Additional Incorporated Terms" shall have the meaning given to such
term in Section 28.1 of the Lease.
"Advance" shall mean a Construction Advance or an Acquisition Advance.
"Affiliate" shall mean, with respect to any Person, any Person or group
acting in concert in respect of the Person in question that, directly or
indirectly, controls or is controlled by or is under common control with such
Person.
"After Tax Basis" shall mean, with respect to any payment to be
received, the amount of such payment increased so that, after deduction of the
amount of all taxes required to be paid by the recipient calculated at the then
maximum marginal rates generally applicable to Persons of the same type as the
recipients with respect to the receipt by the recipient of such amounts (less
any tax savings realized as a result of the payment of the indemnified amount),
such increased payment (as so reduced) is equal to the payment otherwise
required to be made.
"Agency Agreement" shall mean the Agency Agreement, dated on or about
the Initial Closing Date between the Construction Agent and the Lessor.
"Agency Agreement Event of Default" shall mean an "Event of Default" as
defined in Section 5.1 of the Agency Agreement.
"Agent" shall mean NationsBank, N.A., as agent for the Lenders pursuant
to the Credit Agreement, or any successor agent appointed in accordance with the
terms of the Credit
Appendix A-3
<PAGE> 116
Agreement and respecting the Security Documents, for the Lenders and the
Holders, to the extent of their interests.
"Applicable Percentage" shall mean for Eurodollar Loans the LIBOR
Margin referenced in the definition of "Applicable Percentage" in Section 1.01
of the Lessee Credit Agreement plus ten one-hundredths of one percent (0.10%)
and for Eurodollar Holder Advances, one and seventy-five one-hundredths of one
percent (1.75%)
"Appraisal" shall mean, with respect to any Property, an appraisal to
be delivered in connection with the Participation Agreement or in accordance
with the terms of the Lease, in each case prepared by a reputable appraiser
reasonably acceptable to the Agent, which in the judgment of counsel to the
Agent, complies with all of the provisions of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, as amended, the rules and regulations
adopted pursuant thereto, and all other applicable Legal Requirements.
"Appraisal Procedure" shall have the meaning given such term in Section
22.4 of the Lease.
"Approved State" shall mean each of the following: North Carolina and
any other state within the continental United States proposed by the Lessee and
consented to in writing by the Agent.
"Appurtenant Rights" shall mean (a) all agreements, easements, rights
of way or use, rights of ingress or egress, privileges, appurtenances,
tenements, hereditaments and other rights and benefits at any time belonging or
pertaining to the Land underlying the Improvements or the Improvements,
including without limitation the use of any streets, ways, alleys, vaults or
strips of land adjoining, abutting, adjacent or contiguous to the Land and (b)
all permits, licenses and rights, whether or not of record, appurtenant to such
Land or the Improvements.
"Arbitration Rules" shall have the meaning given to such term in
Section 12.7(d) of the Participation Agreement.
"Assignment and Acceptance" shall mean the Assignment and Acceptance in
the form attached to the Credit Agreement as Exhibit B.
"Available Commitment" shall mean, as to any Lender at any time, an
amount equal to the excess, if any, of (a) the amount of such Lender's
Commitment over (b) the aggregate principal amount of all Loans made by such
Lender as of such date after giving effect to Section 5.2(d) of the
Participation Agreement (but without giving effect to any other repayments or
prepayments of any Loans hereunder).
"Available Holder Commitments" shall mean an amount equal to the
excess, if any, of (a) the aggregate amount of the Holder Commitments over (b)
the aggregate amount of the Holder Advances made since the Initial Closing Date
after giving effect to Section 5.2(d) of the
Appendix A-4
<PAGE> 117
Participation Agreement (but without giving effect to any other repayments or
prepayments of any Holder Advances).
"Bankruptcy Code" shall mean Title 11 of the U. S. Code entitled
"Bankruptcy," as now or hereafter in effect or any successor thereto.
"Basic Documents" shall mean the following: the Participation
Agreement, the Agency Agreement, the Trust Agreement, the Certificates, the
Credit Agreement, the Notes, the Lease and the Security Agreement.
"Basic Rent" shall mean, the sum of (a) the Loan Basic Rent and (b) the
Lessor Basic Rent, calculated as of the applicable date on which Basic Rent is
due.
"Basic Term" shall have the meaning specified in Section 2.2 of the
Lease.
"Basic Term Commencement Date" shall have the meaning specified in
Section 2.2 of the Lease.
"Basic Term Expiration Date" shall have the meaning specified in
Section 2.2 of the Lease.
"Benefitted Lender" shall have the meaning specified in Section 9.10(a)
of the Credit Agreement.
"Bill of Sale" shall mean a Bill of Sale regarding Equipment in form
and substance satisfactory to the Agent.
"Board" shall mean the Board of Governors of the Federal Reserve System
of the United States (or any successor).
"Borrower" shall mean the Owner Trustee, not in its individual capacity
but as Borrower under the Credit Agreement.
"Borrowing Date" shall mean any Business Day specified in a notice
delivered pursuant to Section 2.3 of the Credit Agreement as a date on which the
Lessor requests the Lenders to make Loans hereunder.
"Budgeted Total Property Cost" shall mean, at any date of determination
with respect to any Construction Period Property, an amount equal to the
aggregate amount which the Construction Agent in good faith expects to be
expended in order to achieve Completion with respect to such Property.
"Business Day" shall mean a day other than a Saturday, Sunday or other
day on which commercial banks in North Carolina or any other states from which
the Agent, any Lender or any Holder funds or engages in administrative
activities with respect to the transactions under the
Appendix A-5
<PAGE> 118
Operative Agreements are authorized or required by law to close; provided,
however, that when used in connection with a Eurodollar Loan, the term "Business
Day" shall also exclude any day on which banks are not open for dealings in
dollar deposits in the London interbank market.
"Capitalized Lease" shall mean, as applied to any Person, any lease of
property (whether real, personal, tangible, intangible or mixed of such Person)
by such Person as the lessee which would be capitalized on a balance sheet of
such Person prepared in accordance with GAAP.
"Capital Stock" shall mean any nonredeemable capital stock of the
Lessee or any of its Subsidiaries, whether common or preferred.
"Casualty" shall mean any damage or destruction of all or any portion
of the Property as a result of a fire or other casualty.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 42 U.S.C. ss. 9601 et seq., as amended
by the Superfund Amendments and Reauthorization Act of 1986.
"Certificate" shall mean a Certificate in favor of each Holder
regarding the Holder Commitment of such Holder issued pursuant to the terms and
conditions of the Trust Agreement in favor of each Holder.
"Chattel Paper" shall have the meaning given to such term in Section 1
of the Security Agreement.
"Claims" shall mean any and all obligations, liabilities, losses,
actions, suits, penalties, claims, demands, costs and expenses (including
without limitation reasonable attorney's fees and expenses) of any nature
whatsoever.
"Closing Date" shall mean the Initial Closing Date and each Property
Closing Date.
"Code" shall mean the Internal Revenue Code of 1986 together with rules
and regulations promulgated thereunder, as amended from time to time, or any
successor statute thereto.
"Collateral" shall mean all assets of the Lessor, the Construction
Agent and the Lessee, now owned or hereafter acquired, upon which a Lien is
purported to be created by one or more of the Security Documents.
"Commitment" shall mean, as to any Lender, the obligation of such
Lender to make the portion of the Loans to the Lessor in an aggregate principal
amount at any time outstanding not to exceed the amount set forth opposite such
Lender's name on Schedule 1.1 of the Credit Agreement, as such amount may be
increased or reduced from time to time in accordance with the provisions of the
Operative Agreements.
Appendix A-6
<PAGE> 119
"Commitment Percentage" shall mean, as to any Lender at any time, the
percentage which such Lender's Commitment then constitutes of the aggregate
Commitments (or, at any time after the Commitments shall have expired or
terminated, the percentage which the aggregate principal amount of such Lender's
Loans then outstanding constitutes of the aggregate principal amount of all of
the Loans then outstanding), and such Commitment Percentage shall take into
account both the Lender's Tranche A Commitment and the Lender's Tranche B
Commitment.
"Commitment Period" shall mean the period from and including the
Initial Closing Date to and including the Construction Period Termination Date,
or such earlier date as the Commitments shall terminate as provided in the
Credit Agreement or the Holder Commitment shall terminate as provided in the
Trust Agreement.
"Completion" shall mean, with respect to a Property, such time as the
acquisition, installation, testing and final completion of the Improvements on
such Property has been achieved in accordance with the Plans and Specifications,
the Agency Agreement and/or the Lease, and in compliance with all Legal
Requirements and Insurance Requirements and a certificate of occupancy has been
issued with respect to such Property by the appropriate governmental entity
(except if non-compliance, individually or in the aggregate, shall not have and
could not reasonably be expected to have a Material Adverse Effect). If the
Lessor purchases a Property that includes existing Improvements that are to be
immediately occupied by the Lessee without improvements financed pursuant to the
Operative Agreements, the date of Completion for such Property shall be the
Property Closing Date.
"Completion Date" shall mean, with respect to a Property, the earlier
of (a) the date on which Completion for such Property has occurred or (b) the
Construction Period Termination Date.
"Condemnation" shall mean any taking or sale of the use, access,
occupancy, easement rights or title to any Property or any part thereof, wholly
or partially (temporarily or permanently), by or on account of any actual or
threatened eminent domain proceeding or other taking of action by any Person
having the power of eminent domain, including without limitation an action by a
Governmental Authority to change the grade of, or widen the streets adjacent to,
any Property or alter the pedestrian or vehicular traffic flow to any Property
so as to result in a change in access to such Property, or by or on account of
an eviction by paramount title or any transfer made in lieu of any such
proceeding or action.
"Consolidated Subsidiary" shall mean, as to any Person, any Subsidiary
of such Person which under the rules of GAAP consistently applied should have
its financial results consolidated with those of such Person for purposes of
financial accounting statements.
"Construction Advance" shall mean an advance of funds to pay Property
Costs pursuant to Section 5.4 of the Participation Agreement.
"Construction Agent" shall mean Applied Analytical Industries, Inc., a
Delaware corporation, as the construction agent under the Agency Agreement.
Appendix A-7
<PAGE> 120
"Construction Agent Options" shall have the meaning given to such term
in Section 2.1 of the Agency Agreement.
"Construction Budget" shall mean the cost of acquisition, installation,
testing, constructing and developing any Property as determined by the
Construction Agent in its reasonable, good faith judgment.
"Construction Commencement Date" shall mean, with respect to
Improvements, the date on which construction of such Improvements commences
pursuant to the Agency Agreement.
"Construction Contract" shall mean any contract entered into between
the Construction Agent or the Lessee with a Contractor for the construction of
Improvements or any portion thereof on the Property.
"Construction Loan" shall mean any Loan made in connection with a
Construction Advance.
"Construction Loan Property Cost" shall mean with respect to each
Construction Period Property at the date of determination, an amount equal to
(a) the aggregate principal amount of Construction Loans made on or prior to
such date with respect to the Property minus (b) the aggregate principal amount
of prepayments or repayments of the Loans allocated to reduce the Construction
Loan Property Cost of such Property pursuant to Section 2.6(c) of the Credit
Agreement.
"Construction Period" shall mean, with respect to a Property, the
period commencing on the Construction Commencement Date for such Property and
ending on the Completion Date for such Property.
"Construction Period Property" means, at any date of determination, any
Property as to which the Rent Commencement Date has not occurred on or prior to
such date.
"Construction Period Termination Date" shall mean (a) the earlier of
(i) the date that the Commitments have been terminated in their entirety in
accordance with the terms of Section 2.5(a) of the Credit Agreement, or (ii) the
second anniversary of the Initial Closing Date or (b) such later date as may be
agreed to by the Majority Secured Parties.
"Contractor" shall mean each entity with whom the Construction Agent or
the Lessee contracts to construct any Improvements or any portion thereof on the
Property.
"Controlled Group" shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Lessee, are treated as a single employer
under Section 414 of the Code.
Appendix A-8
<PAGE> 121
"Co-Owner Trustee" shall have the meaning specified in Section 9.2 of
the Trust Agreement.
"Credit Agreement" shall mean the Credit Agreement, dated on or about
the Initial Closing Date, among the Lessor, the Agent and the Lenders, as
specified therein.
"Credit Agreement Default" shall mean any event or condition which,
with the lapse of time or the giving of notice, or both, would constitute a
Credit Agreement Event of Default.
"Credit Agreement Event of Default" shall mean any event or condition
defined as an "Event of Default" in Section 6 of the Credit Agreement.
"Credit Documents" shall mean the Participation Agreement, the Agency
Agreement, the Credit Agreement, the Notes and the Security Documents.
"Deed" shall mean a warranty deed regarding the Land and/or
Improvements in form and substance satisfactory to the Agent.
"Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Defaulting Holder" shall have the meaning given to such term in
Section 12.4 of the Participation Agreement.
"Defaulting Lender" shall have the meaning given to such term in
Section 12.4 of the Participation Agreement.
"Deficiency Balance" shall have the meaning given in Section 22.1(b) of
the Lease Agreement.
"Disputes" shall have the meaning given to such term in Section 12.7(d)
of the Participation Agreement.
"Documents" shall have the meaning given to such term in Section 1 of
the Security Agreement.
"Dollars" and "$" shall mean dollars in lawful currency of the United
States of America.
"Election Notice" shall have the meaning given to such term in Section
20.1 of the Lease.
"Eligible Assignee" shall mean (i) a Lender or a Holder, as the case
may be; (ii) an Affiliate of a Lender or a Holder, as the case may be; and (iii)
any other Person approved by the Agent and, unless an Event of Default has
occurred and is continuing at the time any assignment is effected in accordance
with the Operative Agreements, the Lessee or the Construction Agent, such
approval not to be unreasonably withheld or delayed by the Lessee or the
Construction
Appendix A-9
<PAGE> 122
Agent and such approval to be deemed given by the Lessee or the Construction
Agent if no objection is received by the assigning Lender or Holder and the
Agent from the Lessee or the Construction Agent within two Business Days after
notice of such proposed assignment has been provided by the assigning Lender or
Holder to the Lessee or the Construction Agent; provided, however, that neither
the Lessee or the Construction Agent nor an Affiliate of the Lessee or the
Construction Agent shall qualify as an Eligible Assignee.
"Employee Benefit Plan" or "Plan" shall mean an employee benefit plan
(within the meaning of Section 3(3) of ERISA, including without limitation any
Multiemployer Plan), or any "plan" as defined in Section 4975(e)(1) of the Code
and as interpreted by the Internal Revenue Service and the Department of Labor
in rules, regulations, releases or bulletins in effect on any Closing Date.
"Environmental Claims" shall mean any investigation, notice, violation,
demand, allegation, action, suit, injunction, judgment, order, consent decree,
penalty, fine, lien, proceeding, or claim (whether administrative, judicial, or
private in nature) arising (a) pursuant to, or in connection with, an actual or
alleged violation of, any Environmental Law, (b) in connection with any
Hazardous Substance, (c) from any abatement, removal, remedial, corrective, or
other response action in connection with a Hazardous Substance, Environmental
Law, or other order of a Tribunal or (d) from any actual or alleged damage,
injury, threat, or harm to health, safety, natural resources, or the
environment.
"Environmental Laws" shall mean any Law, permit, consent, approval,
license, award, or other authorization or requirement of any Tribunal relating
to emissions, discharges, releases, threatened releases of any Hazardous
Substance into ambient air, surface water, ground water, publicly owned
treatment works, septic system, or land, or otherwise relating to the handling,
storage, treatment, generation, use, or disposal of Hazardous Substances,
pollution or to the protection of health or the environment, including without
limitation CERCLA, the Resource Conservation and Recovery Act, 42 U.S.C. ss.
6901, et seq., and state statutes analogous thereto.
"Environmental Violation" shall mean any activity, occurrence or
condition that violates or threatens (if the threat requires remediation under
any Environmental Law and is not remediated during any grace period allowed
under such Environmental Law) to violate or results in or threatens (if the
threat requires remediation under any Environmental Law and is not remediated
during any grace period allowed under such Environmental Law) to result in
noncompliance with any Environmental Law.
"Equipment" shall mean equipment, apparatus, furnishings, fittings and
personal property of every kind and nature whatsoever purchased, leased or
otherwise acquired using the proceeds of the Loans or the Holder Advances by the
Construction Agent, the Lessee or the Lessor and all improvements and
modifications thereto and replacements thereof, whether or not now owned or
hereafter acquired or now or subsequently attached to, contained in or used or
usable in any way in connection with any operation of any Improvements,
including but without limiting the generality of the foregoing, all equipment
described in the Appraisal including without limitation all heating, electrical,
and mechanical equipment, lighting, switchboards, plumbing, ventilation,
Appendix A-10
<PAGE> 123
air conditioning and air-cooling apparatus, refrigerating, and incinerating
equipment, escalators, elevators, loading and unloading equipment and systems,
cleaning systems (including without limitation window cleaning apparatus),
telephones, communication systems (including without limitation satellite dishes
and antennae), televisions, computers, sprinkler systems and other fire
prevention and extinguishing apparatus and materials, security systems, motors,
engines, machinery, pipes, pumps, tanks, conduits, appliances, fittings and
fixtures of every kind and description.
"Equipment Schedule" shall mean (a) each Equipment Schedule attached to
the applicable Requisition and (b) each Equipment Schedule attached to the
applicable Lease Supplement.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" shall mean each entity required to be aggregated with
the Lessee pursuant to the requirements of Section 414(b) or (c) of the Code.
"Eurocurrency Reserve Requirements" shall mean for any day as applied
to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates
(expressed as a decimal) of reserve requirements in effect on such day
(including without limitation basic, supplemental, marginal and emergency
reserves under any regulations of the Board or other Governmental Authority
having jurisdiction with respect thereto) dealing with reserve requirements
prescribed on eurocurrency funding (currently referred to as "Eurocurrency
liabilities" in Regulation D) maintained by a member bank of the Federal Reserve
System.
"Eurodollar Holder Advance" shall mean a Holder Advance bearing a
Holder Yield based on the Eurodollar Rate.
"Eurodollar Loans" shall mean Loans the rate of interest applicable to
which is based upon the Eurodollar Rate.
"Eurodollar Rate" means, for any Eurodollar Loan or Eurodollar Holder
Advance comprising part of the same borrowing or advance (including without
limitation conversions, extensions and renewals), for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar
Loan or Eurodollar Holder Advance for any Interest Period therefor, the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Reuters Screen LIBO Page as the London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the
first day of such Interest Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on Reuters Screen LIBO
Page, the applicable rate shall be the arithmetic mean of all such rates
(rounded
Appendix A-11
<PAGE> 124
upwards, if necessary, to the nearest 1/100 of 1%). As used herein, "Reuters
Screen LIBO Page" means the display designated as page "LIBO" on the Reuters
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks) ("RMMRS"). In the event the RMMRS is not then quoting such offered
rates, "Eurodollar Rate" shall mean for the Interest Period for each Eurodollar
Loan or Eurodollar Holder Advance comprising part of the same borrowing or
advance (including without limitation conversions, extensions and renewals), the
average (rounded upward to the nearest one sixteenth (1/16) of one percent (1%))
per annum rate of interest determined by the office of the Agent (each such
determination to be conclusive and binding) as of two (2) Business Days prior to
the first day of such Interest Period, as the effective rate at which deposits
in immediately available funds in U.S. dollars are being, have been, or would be
offered or quoted by the Agent to major banks in the applicable interbank market
for Eurodollar deposits at any time during the Business Day which is the second
Business Day immediately preceding the first day of such Interest Period, for a
term comparable to such Interest Period and in the amount of the requested
Eurodollar Loan and/or Eurodollar Holder Advance. If no such offers or quotes
are generally available for such amount, then the Agent shall be entitled to
determine the Eurodollar Rate by estimating in its reasonable judgment the per
annum rate (as described above) that would be applicable if such quote or offers
were generally available.
"Event of Default" shall mean a Lease Event of Default, an Agency
Agreement Event of Default or a Credit Agreement Event of Default.
"Excepted Payments" shall mean: (a) all indemnity payments (including
without limitation indemnity payments made pursuant to Section 11 of the
Participation Agreement), whether made by adjustment to Basic Rent or otherwise,
to which the Owner Trustee, any Holder or any of their respective Affiliates,
agents, officers, directors or employees is entitled;
(b) any amounts (other than Basic Rent or Termination Value) payable
under any Operative Agreement to reimburse the Owner Trustee, any Holder or any
of their respective Affiliates (including without limitation the reasonable
expenses of the Owner Trustee, the Trust Company and the Holders incurred in
connection with any such payment) for performing or complying with any of the
obligations of the Lessee under and as permitted by any Operative Agreement;
(c) any amount payable to a Holder by any transferee of such interest
of a Holder as the purchase price of such Holder's interest in the Trust Estate
(or a portion thereof);
(d) any insurance proceeds (or payments with respect to risks
self-insured or policy deductibles) under liability policies other than such
proceeds or payments payable to the Agent or any Lender;
(e) any insurance proceeds under policies maintained by the Owner
Trustee or any Holder;
Appendix A-12
<PAGE> 125
(f) Transaction Expenses or other amounts, fees, disbursements or
expenses paid or payable to or for the benefit of the Owner Trustee or any
Holder;
(g) all right, title and interest of any Holder or the Owner Trustee to
any Property or any portion thereof or any other property to the extent any of
the foregoing has been released from the Liens of the Security Documents and the
Lease pursuant to the terms thereof;
(h) upon termination of the Credit Agreement pursuant to the terms
thereof, all remaining property covered by the Lease or Security Documents;
(i) all payments in respect of the Holder Yield;
(j) any payments in respect of interest to the extent attributable to
payments referred to in clauses (a) through (i) above; and
(k) any rights of either the Owner Trustee or the Trust Company to
demand, collect, sue for or otherwise receive and enforce payment of any of the
foregoing amounts, provided that such rights shall not include the right to
terminate the Lease.
"Excess Proceeds" shall mean the excess, if any, of the aggregate of
all awards, compensation or insurance proceeds payable in connection with a
Casualty or Condemnation over the Termination Value paid by the Lessee pursuant
to the Lease with respect to such Casualty or Condemnation.
"Exculpated Persons" shall mean the Trust Company (except with respect
to the representations and warranties and the other obligations of the Trust
Company pursuant to the Operative Agreements expressly undertaken in its
individual capacity, including without limitation the representations and
warranties of the Trust Company pursuant to Section 6.1 of the Participation
Agreement, the obligations of the Trust Company pursuant to Section 8.2 of the
Participation Agreement and the obligations of the Trust Company pursuant to the
Trust Agreement), the Holders (except with respect to the obligations of the
Holders pursuant to the Participation Agreement and the Trust Agreement
expressly undertaken in their respective individual capacities), their officers,
directors, shareholders and partners.
"Exempt Payments" shall have the meaning specified in Section 11.2(e)
of the Participation Agreement.
"Expiration Date" shall mean either (a) the Basic Term Expiration Date
or (b) the last day of the applicable Renewal Term; provided, in no event shall
the Expiration Date be later than the annual anniversary of the Initial Closing
Date occurring in the year 2003, unless such later date has been expressly
agreed to in writing by each of the Lessor, the Lessee, the Agent, the Lenders
and the Holders.
"Fair Market Sales Value" shall mean, with respect to any Property, the
amount, which in any event, shall not be less than zero (0), that would be paid
in cash in an arms-length transaction
Appendix A-13
<PAGE> 126
between an informed and willing purchaser and an informed and willing seller,
neither of whom is under any compulsion to purchase or sell, respectively, such
Property. Fair Market Sales Value of any Property shall be determined based on
the assumption that, except for purposes of Section 17 of the Lease, such
Property is in the condition and state of repair required under Section 10.1 of
the Lease and the Lessee is in compliance with the other requirements of the
Operative Agreements.
"Federal Funds Effective Rate" shall have the meaning given to such
term in the definition of ABR.
"Financing Parties" shall mean the Lessor, the Owner Trustee, in its
trust capacity, the Agent, the Holders and the Lenders.
"Fixtures" shall mean all fixtures relating to the Improvements,
including without limitation all components thereof, located in or on the
Improvements, together with all replacements, modifications, alterations and
additions thereto.
"Force Majeure Event" shall mean any event beyond the control of the
Construction Agent, other than a Casualty or Condemnation, including without
limitation strikes, lockouts, adverse soil conditions, acts of God, adverse
weather conditions, inability to obtain labor or materials, governmental
activities, civil commotion and enemy action; but excluding any event, cause or
condition that results from the Construction Agent's financial condition.
"Form 1001" shall have the meaning specified in Section 11.2(e) of the
Participation Agreement.
"Form 4224" shall have the meaning specified in Section 11.2(e) of the
Participation Agreement.
"GAAP" shall mean generally accepted accounting principles set forth in
the opinions and pronouncements of the accounting principles board of the
American Institute of Certified Public Accountants, and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession, that are applicable to the circumstances as of the
date of determination.
"Governmental Action" shall mean all permits, authorizations,
registrations, consents, approvals, waivers, exceptions, variances, orders,
judgments, written interpretations, decrees, licenses, exemptions, publications,
filings, notices to and declarations of or with, or required by, any
Governmental Authority, or required by any Legal Requirement, and shall include,
without limitation, all environmental and operating permits and licenses that
are required for the full use, occupancy, zoning and operating of the Property.
Appendix A-14
<PAGE> 127
"Governmental Authority" shall mean any nation or government, any state
or other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Ground Lease" shall mean a ground lease (in form and substance
satisfactory to the Agent) respecting any Property (a) owned by the Lessee (or a
parent corporation or any Subsidiary of the Lessee) and leased to the Lessor
where such lease has at least a ninety-nine (99) year term and payments set at
no more than $1.00 per year, or (b) where such lease is subject to such other
terms and conditions as are satisfactory to the Agent.
"Hard Costs" shall mean all costs and expenses payable for supplies,
materials, labor and profit with respect to the Improvements under any
Construction Contract.
"Hazardous Substance" shall mean any of the following: (a) any
petroleum or petroleum product, explosives, radioactive materials, asbestos,
formaldehyde, polychlorinated biphenyls, lead and radon gas; (b) any substance,
material, product, derivative, compound or mixture, mineral, chemical, waste,
gas, medical waste, or pollutant, in each case whether naturally occurring,
man-made or the by-product of any process, that is toxic, harmful or hazardous
to the environment or human health or safety as determined in accordance with
any Environmental Law; or (c) any substance, material, product, derivative,
compound or mixture, mineral, chemical, waste, gas, medical waste or pollutant
that would support the assertion of any claim under any Environmental Law,
whether or not defined as hazardous as such under any Environmental Law.
"Holder Advance" shall mean any advance made by any Holder to the Owner
Trustee pursuant to the terms of the Trust Agreement or the Participation
Agreement.
"Holder Amount" shall mean as of any date, the aggregate amount of
Holder Advances made by each Holder to the Trust Estate pursuant to Section 2 of
the Participation Agreement and Section 3.1 of the Trust Agreement less any
payments of any Holder Advances received by the Holders pursuant to Section 3.4
of the Trust Agreement.
"Holder Commitments" shall mean $450,000, as such amount may be
increased or reduced from time to time in accordance with the provisions of the
Operative Agreements; provided, if there shall be more than one (1) Holder, the
Holder Commitment of each Holder shall be as set forth in Schedule I to the
Trust Agreement as such Schedule I may be amended and replaced from time to
time.
"Holder Construction Property Cost" shall mean, with respect to each
Construction Period Property, at any date of determination, an amount equal to
the outstanding Holder Advances made with respect thereto under the Trust
Agreement.
"Holder Overdue Rate" shall mean the lesser of (a) the then current
rate of Holder Yield respecting the particular amount in question plus two
percent (2%) and (b) the highest rate permitted by applicable law.
Appendix A-15
<PAGE> 128
"Holder Property Cost" shall mean with respect to a Property an amount
equal to the outstanding Holder Advances with respect thereto.
"Holder Unused Fee" shall have the meaning given to such term in
Section 7.4 of the Participation Agreement.
"Holder Yield" shall mean with respect to Holder Advances from time to
time either the Eurodollar Rate plus the Applicable Percentage or the ABR as
elected by the Owner Trustee from time to time with respect to such Holder
Advances in accordance with the terms of the Trust Agreement; provided, however,
(a) upon delivery of the notice described in Section 3.7(c) of the Trust
Agreement, the outstanding Holder Advances of each Holder shall bear a yield at
the ABR applicable from time to time from and after the dates and during the
periods specified in Section 3.7(c) of the Trust Agreement, and (b) upon the
delivery by a Holder of the notice described in Section 11.3(f) of the
Participation Agreement, the Holder Advances of such Holder shall bear a yield
at the ABR applicable from time to time after the dates and during the periods
specified in Section 11.3(f) of the Participation Agreement.
"Holders" shall mean NationsBank, N.A. and shall include the other
banks and financial institutions which may be from time to time holders of
Certificates in connection with the AAI Realty Trust 1998-1.
"Impositions" shall mean any and all liabilities, losses, expenses,
costs, charges and Liens of any kind whatsoever for fees, taxes, levies,
imposts, duties, charges, assessments or withholdings ("Taxes") including but
not limited to (i) real and personal property taxes, including without
limitation personal property taxes on any property covered by the Lease that is
classified by Governmental Authorities as personal property, and real estate or
ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes
and other similar taxes (including rent taxes and intangibles taxes); (iii)
excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and
documentary recording taxes and fees; (v) taxes that are or are in the nature of
franchise, income, value added, privilege and doing business taxes, license and
registration fees; (vi) assessments on any Property, including without
limitation all assessments for public Improvements or benefits, whether or not
such improvements are commenced or completed within the Term; and (vii) taxes,
Liens, assessments or charges asserted, imposed or assessed by the PBGC or any
governmental authority succeeding to or performing functions similar to, the
PBGC; and in each case all interest, additions to tax and penalties thereon,
which at any time prior to, during or with respect to the Term or in respect of
any period for which the Lessee shall be obligated to pay Supplemental Rent, may
be levied, assessed or imposed by any Governmental Authority upon or with
respect to (a) any Property or any part thereof or interest therein; (b) the
leasing, financing, refinancing, demolition, construction, substitution,
subleasing, assignment, control, condition, occupancy, servicing, maintenance,
repair, ownership, possession, activity conducted on, delivery, insuring, use,
operation, improvement, sale, transfer of title, return or other disposition of
such Property or any part thereof or interest therein; (c) the Notes, other
indebtedness with respect to any Property, or the Certificates, or any part
thereof or interest therein; (d) the rentals, receipts or earnings arising from
any Property or any part thereof
Appendix A-16
<PAGE> 129
or interest therein; (e) the Operative Agreements, the performance thereof, or
any payment made or accrued pursuant thereto; (f) the income or other proceeds
received with respect to any Property or any part thereof or interest therein
upon the sale or disposition thereof; (g) any contract (including the Agency
Agreement) relating to the construction, acquisition or delivery of the
Improvements or any part thereof or interest therein; (h) the issuance of the
Notes or the Certificates; (i) the Owner Trustee, the Trust or the Trust Estate;
or (j) otherwise in connection with the transactions contemplated by the
Operative Agreements.
"Improvements" shall mean, with respect to the construction,
renovations and/or Modifications on any Land, all buildings, structures,
Fixtures, and other improvements of every kind existing at any time and from
time to time on or under the Land purchased or otherwise acquired using the
proceeds of the Loans or the Holder Advances or which is subject to a Ground
Lease, together with any and all appurtenances to such buildings, structures or
improvements, including without limitation sidewalks, utility pipes, conduits
and lines, parking areas and roadways, and including without limitation all
Modifications and other additions to or changes in the Improvements at any time,
including without limitation (a) any Improvements existing as of the Property
Closing Date as such Improvements may be referenced on the applicable
Requisition and (b) any Improvements made subsequent to such Property Closing
Date.
"Incorporated Covenants" shall have the meaning given to such term in
Section 28.1 of the Lease.
"Incorporated Representations and Warranties" shall have the meaning
given to such term in Section 28.1 of the Lease.
"Indebtedness" of a Person shall mean, without duplication, such
Person's:
(a) obligations for borrowed money;
(b) obligations representing the deferred purchase price of
Property (whether real, personal, tangible, intangible or mixed) or
services (other than accounts payable arising in the ordinary course of
such Person's business payable on terms customary in the trade);
(c) obligations, whether or not assumed, secured by liens or
payable out of the proceeds or production from property now or
hereafter owned or acquired by such Person;
(d) obligations which are evidenced by notes, acceptances or
other instruments;
(e) Capitalized Lease obligations;
(f) net liabilities under interest rate swap, exchange or cap
agreements; and
Appendix A-17
<PAGE> 130
(g) contingent obligations.
"Indemnified Person" shall mean the Lessor, the Owner Trustee, in its
individual and its trust capacity, the Trust, the Trust Company, the Agent, the
Holders, the Lenders and their respective successors, assigns, directors,
shareholders, partners, officers, employees, agents and Affiliates.
"Indemnity Provider" shall mean, respecting each Property, the Lessee.
"Initial Closing Date" shall mean October 2, 1998.
"Initial Construction Advance" shall mean any initial Advance to pay
for: (a) Property Costs for construction of any Improvements; and (b) the
Property Costs of restoring or repairing any Property which is required to be
restored or repaired in accordance with Section 15.1(e) of the Lease.
"Instruments" shall have the meaning given to such term in Section 1 of
the Security Agreement.
"Insurance Requirements" shall mean all terms and conditions of any
insurance policy either required by the Lease to be maintained by the Lessee or
required by the Agency Agreement to be maintained by the Construction Agent, and
all requirements of the issuer of any such policy and, regarding self insurance,
any other requirements of the Lessee.
"Interest Period" shall mean (a) during the Commitment Period and
thereafter as to any Eurodollar Loan or Eurodollar Holder Advance (i) with
respect to the initial Interest Period, the period beginning on the date of the
first Eurodollar Loan and Eurodollar Holder Advance and ending one (1) month
thereafter, as selected by the Lessor (in the case of a Eurodollar Loan) or the
Owner Trustee (in the case of a Eurodollar Holder Advance) in its applicable
notice given with respect thereto and (ii) thereafter, each period commencing on
the last day of the next preceding Interest Period applicable to such Eurodollar
Loan or Eurodollar Holder Advance and ending one (1) month thereafter, as
selected by the Lessor by irrevocable notice to the Agent (in the case of a
Eurodollar Loan) or by the Owner Trustee (in the case of a Eurodollar Holder
Advance) in each case not less than three (3) Business Days prior to the last
day of the then current Interest Period with respect thereto; provided, however,
that all of the foregoing provisions relating to Interest Periods are subject to
the following: (A) if any Interest Period would end on a day which is not a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day (except that where the next succeeding Business Day falls in the
next succeeding calendar month, then on the next preceding Business Day), (B) no
Interest Period shall extend beyond the Maturity Date or the Expiration Date, as
the case may be, (C) where an Interest Period begins on a day for which there is
no numerically corresponding day in the calendar month in which the Interest
Period is to end, such Interest Period shall end on the last Business Day of
such calendar month, and (D) there shall not be more than four (4) Interest
Periods outstanding at any one (1) time.
Appendix A-18
<PAGE> 131
"Investment Company Act" shall mean the Investment Company Act of 1940,
as amended, together with the rules and regulations promulgated thereunder.
"Land" shall mean a parcel of real property described on (a) the
Requisition issued by the Construction Agent on the Property Closing Date
relating to such parcel and (b) the schedules to each applicable Lease
Supplement executed and delivered in accordance with the requirements of Section
2.4 of the Lease.
"Law" shall mean any statute, law, ordinance, regulation, rule,
directive, order, writ, injunction or decree of any Tribunal.
"Lease" or "Lease Agreement" shall mean the Lease Agreement dated on or
about the Initial Closing Date, between the Lessor and the Lessee, together with
any Lease Supplements thereto.
"Lease Default" shall mean any event or condition which, with the lapse
of time or the giving of notice, or both, would constitute a Lease Event of
Default.
"Lease Event of Default" shall have the meaning specified in Section
17.1 of the Lease.
"Lease Supplement" shall mean each Lease Supplement substantially in
the form of Exhibit A to the Lease, together with all attachments and schedules
thereto.
"Legal Requirements" shall mean all foreign, federal, state, county,
municipal and other governmental statutes, laws, rules, orders, regulations,
ordinances, judgments, decrees and injunctions affecting the Owner Trustee, any
Holder, the Lessor, the Lessee, the Agent, any Lender or any Property, Land,
Improvement, Equipment or the taxation, demolition, construction, use or
alteration of such Improvements, whether now or hereafter enacted and in force,
including without limitation any that require repairs, modifications or
alterations in or to any Property or in any way limit the use and enjoyment
thereof (including without limitation all building, zoning and fire codes and
the Americans with Disabilities Act of 1990, 42 U.S.C. ss. 12101 et. seq., and
any other similar federal, state or local laws or ordinances and the regulations
promulgated thereunder) and any that may relate to environmental requirements
(including without limitation all Environmental Laws), and all permits,
certificates of occupancy, licenses, authorizations and regulations relating
thereto, and all covenants, agreements, restrictions and encumbrances contained
in any instruments which are either of record or known to the Lessee affecting
any Property or the Appurtenant Rights.
"Lender Commitments" shall mean $14,550,000, as such amount may be
increased or reduced from time to time in accordance with the provisions of the
Operative Agreements; provided, if there shall be more than one (1) Lender, the
Lender Commitment of each Lender shall be as set forth in Schedule 1.1 to the
Credit Agreement as such Schedule 1.1 may be amended and replaced from time to
time.
Appendix A-19
<PAGE> 132
"Lender Financing Statements" shall mean UCC financing statements and
fixture filings appropriately completed and executed for filing in the
applicable jurisdiction in order to procure a security interest in favor of the
Agent in the Collateral subject to the Security Documents.
"Lender Unused Fee" shall have the meaning given to such term in
Section 7.4 of the Participation Agreement.
"Lenders" shall mean NationsBank, N.A. and shall include the other
banks and financial institutions which may be from time to time party to the
Participation Agreement and the Credit Agreement.
"Lessee" shall have the meaning set forth in the Lease.
"Lessee Credit Agreement" shall mean that certain Loan Agreement dated
as of December 30, 1996 between the Lessee and NationsBank, N.A., as such may
hereafter be amended, modified, supplemented, restated and/or replaced from time
to time.
"Lessee Credit Agreement Event of Default" shall mean an Event of
Default as defined in Article VIII of the Lessee Credit Agreement.
"Lessor" shall mean the Owner Trustee, not in its individual capacity,
but as the Lessor under the Lease.
"Lessor Basic Rent" shall mean the scheduled Holder Yield due on the
Holder Advances on any Scheduled Interest Payment Date pursuant to the Trust
Agreement (but not including interest on (a) any such scheduled Holder Yield due
on the Holder Advances prior to the Rent Commencement Date with respect to the
Property to which such Holder Advances relate or (b) overdue amounts under the
Trust Agreement or otherwise).
"Lessor Financing Statements" shall mean UCC financing statements and
fixture filings appropriately completed and executed for filing in the
applicable jurisdictions in order to protect the Lessor's interest under the
Lease to the extent the Lease is a security agreement or a mortgage.
"Lessor Lien" shall mean any Lien, true lease or sublease or
disposition of title arising as a result of (a) any claim against the Lessor or
the Trust Company, in its individual capacity, not resulting from the
transactions contemplated by the Operative Agreements, (b) any act or omission
of the Lessor or the Trust Company, in its individual capacity, which is not
required by the Operative Agreements or is in violation of any of the terms of
the Operative Agreements, (c) any claim against the Lessor or the Trust Company,
in its individual capacity, with respect to Taxes or Transaction Expenses
against which the Lessee is not required to indemnify the Lessor or the Trust
Company, in its individual capacity, pursuant to Section 11 of the Participation
Agreement or (d) any claim against the Lessor arising out of any transfer by the
Lessor of all or any portion of the interest of the Lessor in the Properties,
the Trust Estate or the Operative Agreements other than the transfer of title to
or possession of any Properties by the Lessor
Appendix A-20
<PAGE> 133
pursuant to and in accordance with the Lease, the Credit Agreement, the Security
Agreement or the Participation Agreement or pursuant to the exercise of the
remedies set forth in Article XVII of the Lease.
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
lien, option or charge of any kind.
"Limited Recourse Amount" shall mean with respect to all the Properties
on an aggregate basis, an amount equal to the sum of the Termination Values with
respect to all the Properties on an aggregate basis on each Payment Date, less
the Maximum Residual Guarantee Amount as of such date with respect to all the
Properties on an aggregate basis.
"Loan Basic Rent" shall mean the scheduled interest due on the Loans on
any Scheduled Interest Payment Date pursuant to the Credit Agreement (but not
including interest on (a) any such Loan due prior to the Rent Commencement Date
with respect to the Property to which such Loan relates or (b) any overdue
amounts under Section 2.8(c) of the Credit Agreement or otherwise).
"Loan Property Cost" shall mean, with respect to each Property at any
date of determination, an amount equal to (a) the aggregate principal amount all
Loans (including without limitation all Acquisition Loans and Construction
Loans) made on or prior to such date with respect to such Property minus (b) the
aggregate amount of prepayments or repayments as the case may be of the Loans
allocated to reduce the Loan Property Cost of such Property pursuant to Section
2.6(c) of the Credit Agreement.
"Loans" shall mean the loans extended pursuant to the Credit Agreement
and shall include both the Tranche A Loans and the Tranche B Loans.
"Majority Holders" shall mean at any time, Holders whose Holder
Advances outstanding represent at least sixty-six and two thirds percent (66
2/3%) of (a) the aggregate Holder Advances outstanding or (b) to the extent
there are no Holder Advances outstanding, the aggregate Holder Commitments.
"Majority Lenders" shall mean at any time, Lenders whose Loans
outstanding represent at least sixty-six and two thirds percent (66 2/3%) of (a)
the aggregate Loans outstanding or (b) to the extent there are no Loans
outstanding, the aggregate of the Lender Commitments.
"Majority Secured Parties" shall mean at any time, Lenders and Holders
whose Loans and Holder Advances outstanding represent at least sixty-six and two
thirds percent (66 2/3%) of (a) the aggregate Advances outstanding or (b) to the
extent there are no Advances outstanding, the sum of the aggregate Holder
Commitments plus the aggregate Lender Commitments.
"Marketing Period" shall mean, if the Lessee has given a Sale Notice in
accordance with Section 20.1 of the Lease, the period commencing on the date
such Sale Notice is given and ending on the Expiration Date.
Appendix A-21
<PAGE> 134
"Material Adverse Effect" shall, mean a material adverse effect on (a)
the business, condition (financial or otherwise), assets, liabilities or
operations of the Lessee, (b) the ability of the Lessee to perform its
respective obligations under any Operative Agreement to which it is a party, (c)
the validity or enforceability of any Operative Agreement or the rights and
remedies of the Agent, the Lenders, the Holders, or the Lessor thereunder, (d)
the validity, priority or enforceability of any Lien on any Property created by
any of the Operative Agreements, or (e) the value, utility or useful life of any
Property or the use, or ability of the Lessee to use, any Property for the
purpose for which it was intended.
"Maturity Date" shall mean the Expiration Date.
"Maximum Amount" shall mean (a) one hundred percent (100%) of the cost
of the Land or the Ground Lease (as the case may be) for all, but not less than
all, the Properties (collectively, the "Land Cost"), plus (b) the product of
eighty-nine and nine tenths percent (89.9%) multiplied by the following: (the
aggregate Termination Value for all, but not less than all, the Properties,
minus the Land Cost, minus all structuring fees payable in connection with the
transactions evidenced by the Operative Agreements to NationsBanc Montgomery
Securities LLC, NationsBank, N.A. and/or any Affiliates of either of the
foregoing, minus the upfront fees payable to the Lenders pursuant to Section 7.6
of the Participation Agreement, minus accrued, unpaid Holder Yield respecting
any and all Construction Period Properties) minus (c) the accreted value
(calculated at a rate of six and twenty four hundredths percent (6.24%) per
annum) of any payments previously made by the Construction Agent or the Lessee
regarding any and all Construction Period Properties and not reimbursed.
"Maximum Residual Guarantee Amount" shall mean an amount equal to the
product of the aggregate Property Cost for all of Properties times eighty-eight
percent (88%).
"Modifications" shall have the meaning specified in Section 11.1(a) of
the Lease.
"Mortgage Instrument" shall mean any mortgage, deed of trust or any
other instrument executed by the Owner Trustee and the Lessee (or regarding any
property subject to a Ground Lease, the applicable Affiliate of the Lessee) in
favor of the Agent (for the benefit of the Lenders and the Holders) and
evidencing a Lien on the Property, in form and substance reasonably acceptable
to the Agent.
"Multiemployer Plan" shall mean any plan described in Section
4001(a)(3) of ERISA to which contributions are or have been made or required by
the Lessee or any of its Subsidiaries or ERISA Affiliates.
"Multiple Employer Plan" shall mean a plan to which the Lessee or any
ERISA Affiliate and at least one (1) other employer other than an ERISA
Affiliate is making or accruing an obligation to make, or has made or accrued an
obligation to make, contributions.
"New Facility" shall have the meaning given to such term in Section
28.1 of the Lease.
Appendix A-22
<PAGE> 135
"Non-Integral Equipment" shall mean Equipment which (a) is personal
property that is readily removable without causing material damage to the
applicable Property and (b) is not integral or necessary, respecting the
applicable Property, for compliance with Section 8.3 of the Lease or otherwise
to the structure thereof, the mechanical operation thereof, the electrical
systems thereof or otherwise with respect to any aspect of the physical plant
thereof.
"Notes" shall mean those notes issued to the Lenders pursuant to the
Credit Agreement and shall include both the Tranche A Notes and the Tranche B
Notes.
"Obligations" shall have the meaning given to such term in Section 1 of
the Security Agreement.
"Officer's Certificate" with respect to any person shall mean a
certificate executed on behalf of such person by a Responsible Officer who has
made or caused to be made such examination or investigation as is necessary to
enable such Responsible Officer to express an informed opinion with respect to
the subject matter of such Officer's Certificate.
"Operative Agreements" shall mean the following: the Participation
Agreement, the Agency Agreement, the Trust Agreement, the Certificates, the
Credit Agreement, the Notes, the Lease, the Lease Supplements (and memoranda of
the Lease and each Lease Supplement in a form reasonably acceptable to the
Agent), the Security Agreement, the Mortgage Instruments, the other Security
Documents, the Ground Leases, the Deeds and the Bills of Sale, the Swap
Agreement and any and all other agreements, documents and instruments executed
in connection with any of the foregoing.
"Original Executed Counterpart" shall have the meaning given to such
term in Section 5 of Exhibit A to the Lease.
"Overdue Interest" shall mean any interest payable pursuant to Section
2.8(b) of the Credit Agreement.
"Overdue Rate" shall mean (a) with respect to the Loan Basic Rent, and
any other amount owed under or with respect to the Credit Agreement or the
Security Documents, the rate specified in Section 2.8(b) of the Credit
Agreement, (b) with respect to the Lessor Basic Rent, the Holder Yield and any
other amount owed under or with respect to the Trust Agreement, the Holder
Overdue Rate, and (c) with respect to any other amount, the amount referred to
in clause (y) of Section 2.8(b) of the Credit Agreement.
"Owner Trustee," "Borrower" or "Lessor" shall mean First Security Bank,
National Association, not individually, except as expressly stated in the
various Operative Agreements, but solely as the Owner Trustee under the AAI
Realty Trust 1998-1, and any successor, replacement and/or additional Owner
Trustee expressly permitted under the Operative Agreements.
Appendix A-23
<PAGE> 136
"Participant" shall have the meaning given to such term in Section 9.7
of the Credit Agreement.
"Participation Agreement" shall mean the Participation Agreement dated
on or about the Initial Closing Date, among the Lessee, the Owner Trustee, not
in its individual capacity except as expressly stated therein, the Holders, the
Lenders and the Agent.
"Payment Date" shall mean any Scheduled Interest Payment Date and any
date on which interest or Holder Yield in connection with a prepayment of
principal on the Loans or of the Holder Advances is due under the Credit
Agreement or the Trust Agreement.
"PBGC" shall mean the Pension Benefit Guaranty Corporation created by
Section 4002(a) of ERISA or any successor thereto.
"Pension Plan" shall mean a "pension plan", as such term is defined in
section 3(2) of ERISA, which is subject to title IV of ERISA (other than a
Multiemployer Plan), and to which the Lessee or any ERISA Affiliate may have any
liability, including without limitation any liability by reason of having been a
substantial employer within the meaning of section 4063 of ERISA at any time
during the preceding five (5) years, or by reason of being deemed to be a
contributing sponsor under section 4069 of ERISA.
"Permitted Facility" shall mean a pharmaceutical development or
manufacturing facility and related administrative offices of the type and size
customarily used and operated by the Lessee in its ordinary course of business
as of the Initial Closing Date.
"Permitted Liens" shall mean:
(a) the respective rights and interests of the parties to the
Operative Agreements as provided in the Operative Agreements;
(b) the rights of any sublessee or assignee under a sublease
or an assignment expressly permitted by the terms of the Lease for no
longer than the duration of the Lease;
(c) Liens for Taxes that either are not yet due or are being
contested in accordance with the provisions of Section 13.1 of the
Lease;
(d) Liens arising by operation of law, materialmen's,
mechanics', workmen's, repairmen's, employees', carriers',
warehousemen's and other like Liens relating to the construction of the
Improvements or in connection with any Modifications or arising in the
ordinary course of business for amounts that either are not more than
thirty (30) days past due or are being diligently contested in good
faith by appropriate proceedings, so long as such proceedings satisfy
the conditions for the continuation of proceedings to contest Taxes set
forth in Section 13.1 of the Lease;
Appendix A-24
<PAGE> 137
(e) Liens of any of the types referred to in clause (d) above
that have been bonded for not less than the full amount in dispute (or
as to which other security arrangements satisfactory to the Lessor and
the Agent have been made), which bonding (or arrangements) shall comply
with applicable Legal Requirements, and shall have effectively stayed
any execution or enforcement of such Liens;
(f) Liens arising out of judgments or awards with respect to
which appeals or other proceedings for review are being prosecuted in
good faith and for the payment of which adequate reserves have been
provided as required by GAAP or other appropriate provisions have been
made, so long as such proceedings have the effect of staying the
execution of such judgments or awards and satisfy the conditions for
the continuation of proceedings to contest Taxes set forth in Section
13.1 of the Lease; and
(g) Liens in favor of municipalities to the extent agreed to
by the Lessor.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, governmental authority or any other entity.
"Plans and Specifications" shall mean, with respect to Improvements,
the plans and specifications for such Improvements to be constructed or already
existing, as such Plans and Specifications may be amended, modified or
supplemented from time to time in accordance with the terms of the Operative
Agreements.
"Prime Lending Rate" shall have the meaning given to such term in the
definition of ABR.
"Property" shall mean, with respect to each Permitted Facility that is
(or is to be) acquired, constructed and/or renovated pursuant to the terms of
the Operative Agreements, the Land and each item of Equipment and the various
Improvements, in each case located on such Land, including without limitation
each Construction Period Property, each Property subject to a Ground Lease and
each Property for which the Basic Term has commenced.
"Property Acquisition Cost" shall mean the cost to the Lessor to
purchase a Property on a Property Closing Date.
"Property Closing Date" shall mean the date on which the Lessor
purchases a Property or, with respect to the first Advance, the date on which
the Lessor seeks reimbursement for Property previously purchased by the Lessor.
"Property Cost" shall mean with respect to a Property the aggregate
amount (and/or the various items and occurrences giving rise to such amounts) of
the Loan Property Cost plus the Holder Property Cost for such Property (as such
amounts shall be increased equally among all Properties respecting the Holder
Advances and the Loans extended from time to time to pay for the Transaction
Expenses, fees, expenses and other disbursements referenced in Sections 7.1(a)
Appendix A-25
<PAGE> 138
and 7.1(b) and indemnity payments pursuant to Section 11.8, in each case, of the
Participation Agreement).
"Purchase Option" shall have the meaning given to such term in Section
20.1 of the Lease.
"Purchasing Lender" shall have the meaning given to such term in
Section 9.8(a) of the Credit Agreement.
"Register" shall have the meaning given to such term in Section 9.9(a)
of the Credit Agreement.
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be modified and
supplemented and in effect from time to time.
"Release" shall mean any release, pumping, pouring, emptying,
injecting, escaping, leaching, dumping, seepage, spill, leak, flow, discharge,
disposal or emission of a Hazardous Substance.
"Renewal Term" shall have the meaning specified in Section 2.2 of the
Lease.
"Rent" shall mean, collectively, the Basic Rent and the Supplemental
Rent, in each case payable under the Lease.
"Rent Commencement Date" shall mean, regarding each Property, the
Completion Date.
"Reportable Event" shall have the meaning specified in ERISA.
"Requested Funds" shall mean any funds requested by the Lessee or the
Construction Agent, as applicable, in accordance with Section 5 of the
Participation Agreement.
"Requisition" shall have the meaning specified in Section 4.2 of the
Participation Agreement.
"Responsible Officer" shall mean the Chairman or Vice Chairman of the
Board of Directors, the Chairman or Vice Chairman of the Executive Committee of
the Board of Directors, the President, any Senior Vice President or Executive
Vice President, any Vice President, the Secretary, any Assistant Secretary, the
Treasurer, or any Assistant Treasurer, except that when used with respect to the
Trust Company or the Owner Trustee, "Responsible Officer" shall also include the
Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer,
the Controller and any Assistant Controller or any other officer of the Trust
Company or the Owner Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust
Appendix A-26
<PAGE> 139
matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Sale Date" shall have the meaning given to such term in Section
22.1(a) of the Lease.
"Sale Notice" shall mean a notice given to the Lessor in connection
with the election by the Lessee of its Sale Option.
"Sale Option" shall have the meaning given to such term in Section 20.1
of the Lease.
"Sale Proceeds Shortfall" shall mean the amount by which the proceeds
of a sale described in Section 22.1 of the Lease are less than the Limited
Recourse Amount with respect to the Properties if it has been determined that
the Fair Market Sales Value of the Properties at the expiration of the term of
the Lease has been impaired by greater than ordinary wear and tear during the
Term of the Lease.
"Scheduled Interest Payment Date" shall mean (a) as to any Eurodollar
Loan or Eurodollar Holder Advance, the last day of the Interest Period
applicable to such Eurodollar Loan or Eurodollar Holder Advance, (b) as to any
ABR Loan or any ABR Holder Advance, the fifteenth day of each month and (c) as
to all Loans and Holder Advances, the date of any voluntary or involuntary
payment, prepayment, return or redemption, and the Maturity Date or the
Expiration Date, as the case may be.
"Secured Parties" shall have the meaning given to such term in the
Security Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"Security Agreement" shall mean the Security Agreement dated on or
about the Initial Closing Date between the Lessor and the Agent, for the benefit
of the Secured Parties, and accepted and agreed to by the Lessee.
"Security Documents" shall mean the collective reference to the
Security Agreement, the Mortgage Instruments, (to the extent the Lease is
construed as a security instrument) the Lease, the UCC Financing Statements and
all other security documents hereafter delivered to the Agent granting a lien on
any asset or assets of any Person to secure the obligations and liabilities of
the Lessor under the Credit Agreement and/or under any of the other Credit
Documents or to secure any guarantee of any such obligations and liabilities.
"Soft Costs" shall mean all costs which are ordinarily and reasonably
incurred in relation to the acquisition, development, installation,
construction, improvement and testing of the Properties other than Hard Costs,
including without limitation structuring fees, administrative fees, legal fees,
upfront fees, fees and expenses related to appraisals, title examinations, title
insurance, document recordation, surveys, environmental site assessments,
geotechnical soil investigations and similar costs and professional fees
customarily associated with a real estate
Appendix A-27
<PAGE> 140
closing, the Lender Unused Fee, the Holder Unused Fee, fees and expenses of the
Owner Trustee payable or reimbursable under the Operative Agreements and costs
and expenses incurred pursuant to Sections 7.3(a) and 7.3(b) of the
Participation Agreement.
"Subsidiary" shall mean, as to any Person, any corporation of which at
least a majority of the outstanding stock having by the terms thereof ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person, or by one (1)
or more Subsidiaries, or by such Person and one (1) or more Subsidiaries.
"Supplemental Amounts" shall have the meaning given to such term in
Section 9.18 of the Credit Agreement.
"Supplemental Rent" shall mean all amounts, liabilities and obligations
(other than Basic Rent) which the Lessee assumes or agrees to pay to the Lessor,
the Trust Company, the Holders, the Agent, the Lenders or any other Person under
the Lease or under any of the other Operative Agreements including without
limitation payments of the Termination Value and the Maximum Residual Guarantee
Amount and all indemnification amounts, liabilities and obligations.
"Swap Agreement" shall mean that certain ISDA Master Agreement dated as
of September 23, 1998 between NationsBank, N.A. and the Owner Trustee, together
with any schedules thereto and all documents and other confirming evidence
exchanged between the parties confirming the transactions that are or will be
governed by such ISDA Master Agreement.
"Taxes" shall have the meaning specified in the definition of
"Impositions".
"Term" shall mean the Basic Term and each Renewal Term, if any.
"Termination Date" shall have the meaning specified in Section 16.2(a)
of the Lease.
"Termination Event" shall mean (a) with respect to any Pension Plan,
the occurrence of a Reportable Event or an event described in Section 4062(e) of
ERISA, (b) the withdrawal of the Lessee or any ERISA Affiliate from a Multiple
Employer Plan during a plan year in which it was a substantial employer (as such
term is defined in Section 4001(a)(2) of ERISA), or the termination of a
Multiple Employer Plan, (c) the distribution of a notice of intent to terminate
a Plan or Multiemployer Plan pursuant to Section 4041(a)(2) or 4041A of ERISA,
(d) the institution of proceedings to terminate a Plan or Multiemployer Plan by
the PBGC under Section 4042 of ERISA, (e) any other event or condition which
might constitute grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, any Plan or Multiemployer Plan, or
(f) the complete or partial withdrawal of the Lessee or any ERISA Affiliate from
a Multiemployer Plan.
"Termination Notice" shall have the meaning specified in Section 16.1
of the Lease.
Appendix A-28
<PAGE> 141
"Termination Value" shall mean the sum of (a) either (i) with respect
to all Properties, an amount equal to the aggregate outstanding Property Cost
for all the Properties, in each case as of the last occurring Payment Date, or
(ii) with respect to a particular Property, an amount equal to the product of
the Termination Value of all the Properties times a fraction, the numerator of
which is the Property Cost allocable to the particular Property in question and
the denominator of which is the aggregate Property Cost for all the Properties,
in each case as of the last occurring Payment Date, plus (b) respecting the
amounts described in each of the foregoing subclause (i) or (ii), as applicable,
any and all accrued but unpaid interest on the Loans and any and all Holder
Yield on the Holder Advances related to the applicable Property Cost, plus (c)
to the extent the same is not duplicative of the amounts payable under clause
(b) above, all other Rent and other amounts then due and payable or accrued
under the Agency Agreement, Lease and/or under any other Operative Agreement
(including without limitation amounts under Sections 11.1 and 11.2 of the
Participation Agreement and all costs and expenses referred to in clause FIRST
of Section 22.2 of the Lease).
"Tranche A Commitments" shall mean the obligation of the Tranche A
Lenders to make the Tranche A Loans to the Lessor in an aggregate principal
amount at any one (1) time outstanding not to exceed the aggregate of the
amounts set forth opposite each Tranche A Lender's name on Schedule 1.1 to the
Credit Agreement, as such amount may be reduced from time to time in accordance
with the provisions of the Operative Agreements; provided, no Tranche A Lender
shall be obligated to make Tranche A Loans in excess of such Tranche A Lender's
share of the Tranche A Commitments as set forth adjacent to such Tranche A
Lender's name on Schedule 1.1 to Credit Agreement.
"Tranche A Lenders" shall mean NationsBank, N.A. and shall include the
several banks and other financial institutions from time to time party to the
Credit Agreement that commit to make the Tranche A Loans.
"Tranche A Loans" shall mean the Loans made pursuant to the Tranche A
Commitment.
"Tranche A Note" shall have the meaning given to it in Section 2.2 of
the Credit Agreement.
"Tranche B Commitments" shall mean the obligation of the Tranche B
Lenders to make the Tranche B Loans to the Lessor in an aggregate principal
amount at any one (1) time outstanding not to exceed the aggregate of the
amounts set forth opposite each Tranche B Lender's name on Schedule 1.1 to the
Credit Agreement, as such amount may be reduced from time to time in accordance
with the provisions of the Operative Agreements; provided, no Tranche B Lender
shall be obligated to make Tranche B Loans in excess of such Tranche B Lender's
share of the Tranche B Commitments as set forth adjacent to such Tranche B
Lender's name on Schedule 1.1 to Credit Agreement.
"Tranche B Lenders" shall mean NationsBank, N.A. and shall include the
several banks and other financial institutions from time to time party to the
Credit Agreement that commit to make the Tranche B Loans.
Appendix A-29
<PAGE> 142
"Tranche B Loan" shall mean the Loans made pursuant to the Tranche B
Commitment.
"Tranche B Note" shall have the meaning given to it in Section 2.2 of
the Credit Agreement.
"Transaction Expenses" shall mean all Soft Costs and all other costs
and expenses incurred in connection with the preparation, execution and delivery
of the Operative Agreements and the transactions contemplated by the Operative
Agreements including without limitation all costs and expenses described in
Section 7.1 of the Participation Agreement and the following:
(a) the reasonable fees, out-of-pocket expenses and
disbursements of counsel in negotiating the terms of the Operative
Agreements and the other transaction documents, preparing for the
closings under, and rendering opinions in connection with, such
transactions and in rendering other services customary for counsel
representing parties to transactions of the types involved in the
transactions contemplated by the Operative Agreements;
(b) the reasonable fees, out-of-pocket expenses and
disbursements of accountants for the Lessee or the Construction Agent
in connection with the transaction contemplated by the Operative
Agreements;
(c) any and all other reasonable fees, charges or other
amounts payable to the Lenders, the Agent, the Holders, the Owner
Trustee or any broker which arises under any of the Operative
Agreements;
(d) any other reasonable fee, out-of-pocket expenses,
disbursement or cost of any party to the Operative Agreements or any of
the other transaction documents; and
(e) any and all Taxes and fees incurred in recording or filing
any Operative Agreement or any other transaction document, any deed,
declaration, mortgage, security agreement, notice or financing
statement with any public office, registry or governmental agency in
connection with the transactions contemplated by the Operative
Agreement.
"Tribunal" shall mean any state, commonwealth, federal, foreign,
territorial, or other court or government body, subdivision agency, department,
commission, board, bureau or instrumentality of a governmental body.
"Trust" shall mean the AAI Realty Trust 1998-1.
"Trust Agreement" shall mean the Trust Agreement dated on or about the
Initial Closing Date between the Holders and the Owner Trustee.
"Trust Company" shall mean First Security Bank, National Association,
in its individual capacity, and any successor owner trustee under the Trust
Agreement in its individual capacity.
Appendix A-30
<PAGE> 143
"Trust Estate" shall have the meaning specified in Section 2.2 of the
Trust Agreement.
"Type" shall mean, as to any Loan, whether it is an ABR Loan or a
Eurodollar Loan.
"UCC Financing Statements" shall mean collectively the Lender Financing
Statements and the Lessor Financing Statements.
"Unanimous Vote Matters" shall have the meaning given it in Section
12.4 of the Participation Agreement.
"Unfunded Amount" shall have the meaning specified in Section 3.2 of
the Agency Agreement.
"Unfunded Liability" shall mean, with respect to any Plan, at any time,
the amount (if any) by which (a) the present value of all benefits under such
Plan exceeds (b) the fair market value of all Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plan, but only to the extent that such excess represents a potential liability
of the Company or any member of the Controlled Group to the PBGC or such Plan
under Title IV of ERISA.
"Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial
Code as in effect in any applicable jurisdiction.
"United States Bankruptcy Code" shall mean Title 11 of the United
States Code.
"Unused Fee" shall mean, collectively, the Holder Unused Fee and the
Lender Unused Fee.
"Unused Fee Payment Date" shall mean the last Business Day of each
December, March, June and September and the last Business Day of the Commitment
Period, or such earlier date as the Commitments shall terminate as provided in
the Credit Agreement or the Holder Commitment shall terminate as provided in the
Trust Agreement.
"U.S. Person" shall have the meaning specified in Section 11.2(e) of
the Participation Agreement.
"U.S. Taxes" shall have the meaning specified in Section 11.2(e) of the
Participation Agreement.
"Withholdings" shall have the meaning specified in Section 11.2(e) of
the Participation Agreement.
Appendix A-31
<PAGE> 144
"Work" shall mean the furnishing of labor, materials, components,
furniture, furnishings, fixtures, appliances, machinery, equipment, tools,
power, water, fuel, lubricants, supplies, goods and/or services with respect to
any Property.
"Year 2000 Compliant" shall have the meaning specified in Section
6.2(v) of the Participation Agreement.
"Year 2000 Problem" shall mean the risk that computer applications used
by the Lessee, any of its Subsidiaries or any supplier, vendor or customer of
the Lessee or any of its Subsidiaries may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999.
Appendix A-32
<PAGE> 1
EXHIBIT 10.13
- -------------------------------------------------------------------------------
SECURITY AGREEMENT
Dated as of October 2, 1998
between
FIRST SECURITY BANK, NATIONAL ASSOCIATION,
not individually, but solely as the Owner Trustee under
the AAI Realty Trust 1998-1
and
NationsBank, N.A.,
as the Agent for the Lenders and the Holders
- -------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Definitions......................................................................................... 2
2. Grant of Security Interest.......................................................................... 3
3. Payment of Obligations.............................................................................. 5
4. Other Covenants..................................................................................... 6
5. Default; Remedies................................................................................... 6
6. Remedies Not Exclusive.............................................................................. 7
7. Performance by the Agent of the Borrower's Obligations.............................................. 7
8. Duty of the Agent................................................................................... 7
9. Powers Coupled with an Interest..................................................................... 8
10. Execution of Financing Statements................................................................... 8
11. Security Agreement Under Uniform Commercial Code.................................................... 8
12. Authority of the Agent.............................................................................. 9
13. Notices............................................................................................. 9
14. Severability........................................................................................ 9
15. Amendment in Writing; No Waivers; Cumulative Remedies............................................... 9
16. Section Headings.................................................................................... 10
17. Successors and Assigns.............................................................................. 10
18. The Borrower's Waiver of Rights..................................................................... 10
19. GOVERNING LAW....................................................................................... 11
20. Obligations Are Without Recourse.................................................................... 11
21. Partial Release; Full Release....................................................................... 11
22. Miscellaneous....................................................................................... 11
23. Conflicts with Participation Agreement.............................................................. 12
24. LESSEE AS A PARTY................................................................................... 12
</TABLE>
i
<PAGE> 3
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of October 2, 1998 (as amended,
modified, extended, supplemented, restated and/or replaced from time to time,
this "Security Agreement"), is made between FIRST SECURITY BANK, NATIONAL
ASSOCIATION, a national banking association, not individually, but solely as
Owner Trustee under the AAI Realty Trust 1998-1 (the "Borrower"), and
NationsBank, N.A., a national banking association ("Bank"), as agent for (a)
the Lenders (hereinafter defined) under the Credit Agreement dated as of
October 2, 1998 (as amended, modified, extended, supplemented, restated and/or
replaced from time to time, the "Credit Agreement") by and among the Borrower,
the lending institutions from time to time parties thereto (the "Lenders") and
Bank as the agent for the Lenders and (b) the holders of the certificates
issued pursuant to the Trust Agreement dated as of October 2, 1998 (as amended,
modified, extended, supplemented, restated and/or replaced from time to time,
the "Trust Agreement") among the holders from time to time parties thereto (the
"Holders") and the Borrower, in its individual capacity thereunder and in its
capacity as Owner Trustee thereunder. The Lenders and the Holders, together
with their successors and permitted assigns, are collectively referred to
hereinafter as the "Secured Parties." Bank, in its capacity as agent for the
Secured Parties, is referred to hereinafter as the "Agent." This Security
Agreement is accepted and agreed to by APPLIED ANALYTICAL INDUSTRIES, INC., a
Delaware corporation.
Preliminary Statement
Pursuant to the Credit Agreement, the Lenders have severally agreed to
make Loans to the Borrower in an aggregate amount not to exceed $14,550,000
upon the terms and subject to the conditions set forth therein, to be evidenced
by the Notes issued by the Borrower under the Credit Agreement. Pursuant to the
Trust Agreement, the Holders have agreed to purchase the ownership interests of
the Trust created thereby in an aggregate amount not to exceed $450,000 upon
the terms and subject to the conditions set forth therein, to be evidenced by
the Certificates issued by the Borrower under the Trust Agreement. The Borrower
is, or shall be upon the date of the initial Advance with respect to each
Property, the legal and beneficial owner of such Property (except the Borrower
may have a ground leasehold interest in certain Properties pursuant to one (1)
or more Ground Leases).
It is a condition, among others, to the obligation of the Lenders to
make their respective Loans to the Borrower under the Credit Agreement and the
Holders to make their respective Holder Advances under the Trust Agreement that
the Borrower shall have executed and delivered this Security Agreement to the
Agent, for the benefit of the Lenders and the Holders.
NOW, THEREFORE, in consideration of the premises and to induce the
Lenders to make their respective Loans under the Credit Agreement and to induce
the Holders to make their respective Holder Advances under the Trust Agreement,
the Borrower hereby agrees with the Agent, for the benefit of the Lenders and
the Holders, as follows:
<PAGE> 4
1. DEFINITIONS.
(a) As used herein, the following terms shall have the following
respective meanings:
"Accounts" shall mean all "accounts," as such term is defined
in the Uniform Commercial Code, now owned or hereafter acquired by the
Borrower, including without limitation (i) all accounts receivable,
other receivables, book debts and other forms of obligations now owned
or hereafter received or acquired by or belonging or owing to the
Borrower, whether arising out of goods sold or leased or services
rendered by it or from any other transaction (including without
limitation any such obligations which may be characterized as an
account under the Uniform Commercial Code), (ii) all of the Borrower's
rights in, to and under all purchase orders or receipts now owned or
hereafter acquired by it for goods or services, (iii) all of the
Borrower's rights to any goods represented by any of the foregoing
(including without limitation unpaid sellers' rights of rescission,
replevin, reclamation and stoppage in transit and rights to returned,
reclaimed or repossessed goods), (iv) all monies due or to become due
to the Borrower under all purchase orders and contracts for the sale
or lease of goods or the performance of services or both by the
Borrower (whether or not yet earned by performance on the part of the
Borrower now) or hereafter in existence, including without limitation
the right to receive the proceeds of said purchase orders and
contracts, and (v) all collateral security and guarantees of any kind,
now or hereafter in existence, given by any Person with respect to any
of the foregoing.
"Chattel Paper" shall mean any and all "chattel paper," as
such term is defined in the Uniform Commercial Code, now owned or
hereafter acquired by the Borrower, wherever located.
"Documents" shall mean any and all "documents", as such term
is defined in the Uniform Commercial Code, now owned or hereafter
acquired by the Borrower, wherever located, including without
limitation each bill of lading, dock warrant, dock receipt, warehouse
receipt or order for the delivery of goods, and also any other
document which in the regular course of business or financing is
treated as adequately evidencing that the person in possession of it
is entitled to receive, hold and dispose of the document and the goods
it covers.
"General Intangibles" shall mean any and all "general
intangibles," as such term is defined in the Uniform Commercial Code,
now owned or hereafter acquired by the Borrower, including without
limitation all contracts, undertakings, or agreements in or under
which the Borrower may now or hereafter have any right (other than any
right evidenced by Chattel Paper, Documents or Instruments), title or
interest, including without limitation any agreements relating to the
terms of payment or the terms of performance of any Account.
"Holders" shall have the meaning specified in the first
paragraph of this Security Agreement.
<PAGE> 5
"Instruments" shall mean any and all "instruments", as such
term is defined in the Uniform Commercial Code, now owned or hereafter
acquired by the Borrower, wherever located, including without
limitation all certificated securities, all certificates of deposit,
and all notes and other, without limitation, evidences of
indebtedness, other than instruments that constitute, or are a part of
a group of writings that constitute, Chattel Paper.
"Investment Property" shall mean any and all "investment
property," as such term is defined in the Uniform Commercial Code, now
owned or hereafter acquired by the Borrower, wherever located.
"Lenders" shall have the meaning specified in the first
paragraph of this Security Agreement.
"Lessee" shall mean Applied Analytical Industries, Inc., a
Delaware corporation, its successors, permitted assigns and permitted
transferees.
"Obligations" shall mean any and all obligations of the
Borrower, now existing or hereafter arising under the Credit
Agreement, the Notes, the Trust Agreement, the Certificates and/or any
other Operative Agreement.
(b) Capitalized terms used but not otherwise defined in
this Security Agreement shall have the respective meanings specified
in the Credit Agreement or Appendix A to the Participation Agreement
dated as of __________, 1998 (as amended, modified, extended,
supplemented, restated and/or replaced from time to time in accordance
with the applicable provisions thereof, the "Participation Agreement")
among Lessee, the Borrower, the Holders, the Lenders and the
NationsBank, N.A. as agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and the Holders, to the extent
of their interests.
(c) The rules of usage set forth in Appendix A to the
Participation Agreement shall apply to this Agreement.
2. GRANT OF SECURITY INTEREST.
To secure payment of all the amounts advanced under the Credit
Agreement in connection with the Notes, all the amounts advanced or contributed
under the Trust Agreement in connection with the Certificates and all other
amounts now or hereafter owing to the Lenders, the Holders or the Agent
thereunder or under any other Operative Agreement, THE BORROWER HEREBY CONVEYS,
GRANTS, ASSIGNS, TRANSFERS, HYPOTHECATES, MORTGAGES AND SETS OVER TO THE AGENT
FOR THE BENEFIT OF THE SECURED PARTIES, A FIRST PRIORITY SECURITY INTEREST IN
AND LIEN ON THE TRUST ESTATE, WHETHER NOW EXISTING OR HEREAFTER ACQUIRED
INCLUDING WITHOUT LIMITATION THE FOLLOWING:
<PAGE> 6
(a) all right, title and interest of the
Borrower in and to the Operative Agreements now existing or
hereafter acquired by the Borrower (including without
limitation all rights to payment and indemnity rights of the
Borrower under the Participation Agreement) (all of the
foregoing in this paragraph (a) being referred to as the
"Rights in Operative Agreements");
(b) all right, title and interest of the
Borrower in and to all of the Equipment;
(c) all right, title and interest of the
Borrower in and to all of the Fixtures;
(d) all the estate, right, title, claim or
demand whatsoever of the Borrower, in possession or
expectancy, in and to each Property, Fixture or Equipment or
any part thereof;
(e) all right, title and interest of the
Borrower in and to all substitutes, modifications and
replacements of, and all additions, accessions and
improvements to, the Fixtures and Equipment, subsequently
acquired or leased by the Borrower or constructed, assembled
or placed by the Borrower on any Property, immediately upon
such acquisition, lease, construction, assembling or
placement, and in each such case, without any further
conveyance, assignment or other act by the Borrower;
(f) all right, title and interest of the
Borrower in, to and under books and records relating to or
used in connection with the operation of one (1) or more
Properties or any part thereof; all rights of the Borrower to
the payment of money and all property; and all rights in and
to any causes of action or choses in action now or hereafter
existing in favor of the Borrower and all rights to any
recoveries therefrom;
(g) all right, title and interest of the
Borrower in and to all unearned premiums under insurance
policies now held or subsequently obtained by the Lessee
relating to one (1) or more Properties and the Borrower's
interest in and to all proceeds of any insurance policies
maintained by or for the benefit of the Borrower, including
without limitation any right to collect and receive such
proceeds; and all awards and other compensation, including
without limitation the interest payable thereon and any right
to collect and receive the same, made to the present or any
subsequent owner of any Property for the taking by eminent
domain, condemnation or otherwise, of all or any part of any
Property or any easement or other right therein;
(h) all right, title and interest of the
Borrower in and to (i) all consents, licenses, certificates
and other governmental approvals relating to construction,
<PAGE> 7
completion, use or operation of any Property or any part
thereof and (ii) all Plans and Specifications relating to any
Property;
(i) all right, title and interest of the
Borrower in and to all Rent and all other rents, payments,
purchase prices, receipts, revenues, issues and profits
payable under the Lease or pursuant to any other lease with
respect to any Property;
(j) all right, title and interest of the
Borrower in and to all Instruments and Documents;
(k) all right, title and interest of the
Borrower in and to all General Intangibles;
(l) all right, title and interest of the
Borrower in and to all Chattel Paper (including without
limitation all rights under the Lease) and each Ground Lease;
(m) all right, title and interest of the
Borrower in and to all money, cash or cash equivalent and
bank accounts;
(n) all right, title and interest of the
Borrower in and to all Accounts;
(o) all right, title and interest of the
Borrower in and to all proceeds of letters of credit issued
in favor of the Borrower in connection with any Property; and
(p) all right, title and interest of the
Borrower in and to all proceeds, both cash and noncash, of
any of the foregoing.
(All of the foregoing property and rights and interests now owned or
held or subsequently acquired by the Borrower and described in the foregoing
clauses (a) through (p) are collectively referred to as the "Trust Property").
TO HAVE AND TO HOLD the Trust Property and the rights and privileges
hereby granted unto the Agent (for the benefit of the Lenders and the Holders)
its successors and assigns for the uses and purposes set forth, until all of
the obligations of the Borrower under the Operative Agreements are paid in
full; provided, that EXCLUDED from the Trust Property at all times and in all
respects shall be all Excepted Payments.
3. PAYMENT OF OBLIGATIONS.
The Borrower shall pay all Obligations in accordance with the terms of
the Credit Agreement, the Notes, the Trust Agreement, the Certificates and the
other Operative Agreements
<PAGE> 8
and perform each term to be performed by it under the Credit Agreement, the
Notes, the Trust Agreement, the Certificates and the other Operative
Agreements.
4. OTHER COVENANTS.
At any time and from time to time, upon the written request of the
Agent, and at the expense of the Borrower (with funds provided by the Lessee
for such purpose), the Borrower will promptly and duly execute and deliver such
further instruments and documents and take such further actions as the Agent
reasonably may request for the purposes of obtaining or preserving the full
benefits of this Security Agreement and of the rights and powers granted by
this Security Agreement.
5. DEFAULT; REMEDIES.
(a) If a Credit Agreement Event of Default has occurred
and is continuing:
(i) the Agent, in addition to all other
remedies available at law or in equity, shall have the right
forthwith to enter upon any Property (or any other place
where any component of any Property is located at such time)
without charge, and take possession of all or any portion of
the Trust Property, and to re-let the Trust Property and
receive the rents, issues and profits thereof, to make
repairs and to apply said rentals and profits, after payment
of all necessary or proper charges and expenses, on account
of the amounts hereby secured (subject to the Excepted
Payments); and
(ii) the Agent, shall, as a matter of right, be
entitled to the appointment of a receiver for the Trust
Property, and the Borrower hereby consents to such
appointment and waives notice of any application therefor.
(b) If a Credit Agreement Event of Default has occurred
and is continuing, the Agent may proceed by an action at law, suit in
equity or other appropriate proceeding, to protect and enforce its
rights, whether for the foreclosure of the Lien of this Security
Agreement, or for the specific performance of any agreement contained
herein or for an injunction against the violation of any of the terms
hereof. The proceeds of any sale of any of the Trust Property shall be
applied pursuant to Section 8.7 of the Participation Agreement. In
addition, the Agent may proceed under Section 11 hereof.
(c) The Borrower hereby waives the benefit of all
appraisement, valuation, stay, extension and redemption laws now or
hereafter in force and all rights of marshalling in the event of any
sale of the Trust Property or any portion thereof or interest therein.
<PAGE> 9
6. REMEDIES NOT EXCLUSIVE.
The Agent shall be entitled to enforce payment of the indebtedness and
performance of the Obligations and to exercise all rights and powers under this
Security Agreement or under any of the other Operative Agreements or other
agreements or any laws now or hereafter in force, notwithstanding some or all
of the Obligations may now or hereafter be otherwise secured, whether by deed
of trust, mortgage, security agreement, pledge, Lien, assignment or otherwise.
Neither the acceptance of this Security Agreement nor its enforcement, shall
prejudice or in any manner affect the Agent's right to realize upon or enforce
any other security now or hereafter held by the Agent, it being agreed that the
Agent shall be entitled to enforce this Security Agreement and any other
security now or hereafter held by the Agent in such order and manner as the
Agent may determine in its absolute discretion. No remedy conferred hereunder
or under any other Operative Agreement upon or reserved to the Agent is
intended to be exclusive of any other remedy herein or therein or by law
provided or permitted, but each shall be cumulative and shall be in addition to
every other remedy given hereunder or thereunder or now or hereafter existing
at law or in equity or by statute. Every power or remedy given by any of the
Operative Agreements to the Agent or to which it may otherwise be entitled, may
be exercised, concurrently or independently, from time to time and as often as
may be deemed expedient by the Agent. In no event shall the Agent, in the
exercise of the remedies provided in this Security Agreement (including without
limitation in connection with the assignment of Rents to the Agent, or the
appointment of a receiver and the entry of such receiver onto all or any part
of the Land), be deemed a "mortgagee in possession" or a "pledgee in
possession", and the Agent shall not in any way be made liable for any act,
either of commission or omission, in connection with the exercise of such
remedies.
7. PERFORMANCE BY THE AGENT OF THE BORROWER'S OBLIGATIONS.
If the Borrower fails to perform or comply with any of its agreements
contained herein the Agent, at its option, but without any obligation so to do,
may perform or comply, or otherwise cause performance or compliance, with such
agreement. The expenses of the Agent incurred in connection with actions
undertaken as provided in this Section 7, together with interest thereon at a
rate per annum equal to the Overdue Rate, from the date of payment by the Agent
to the date reimbursed by the Borrower, shall be payable by the Borrower (with
funds provided by the Lessee for such purpose) to the Agent on demand and
constitutes part of the Obligations secured hereby.
8. DUTY OF THE AGENT.
The Agent's sole duty with respect to the custody, safekeeping and
physical preservation of any Trust Property in its possession, under Section
9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in
the same manner as the Agent deals with similar property for its own account.
Neither the Agent, any Lender, any Holder nor any of their respective
directors, officers, employees, shareholders, partners or agents shall be
liable for failure to demand, collect or realize upon any of the Trust Property
or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Trust Property upon the request of the Borrower or
<PAGE> 10
any other Person or to take any other action whatsoever with regard to the
Trust Property or any part thereof.
9. POWERS COUPLED WITH AN INTEREST.
All powers, authorizations and agencies contained in this Security
Agreement are coupled with an interest and are irrevocable until this Security
Agreement is terminated and the Liens created hereby are released.
10. EXECUTION OF FINANCING STATEMENTS.
Pursuant to Section 9-402 of the Uniform Commercial Code, the Borrower
authorizes the Agent at the expense of the Borrower (such amounts to be paid
with funds provided by the Lessee for such purpose) to file financing
statements with respect to the Trust Property under this Security Agreement
without the signature of the Borrower in such form and in such filing offices
as the Agent reasonably determines appropriate to perfect the security
interests of the Agent under this Security Agreement. A carbon, photographic or
other reproduction of this Security Agreement shall be sufficient as a
financing statement for filing in any jurisdiction. For purposes of such
financing statement, the Borrower shall be deemed to be the debtor, and the
Agent shall be deemed to be the secured party. The address of the Borrower is
79 South Main Street, Salt Lake City, Utah 84111, Attention: Val T. Orton, Vice
President, and the address of the Agent is NationsBank, N.A., 101 North Tryon
Street, Independence Center, 15th Floor, NC1-001-15-04, Attention: Agency
Services.
11. SECURITY AGREEMENT UNDER UNIFORM COMMERCIAL CODE.
(a) It is the intention of the parties hereto that this
Security Agreement as it relates to matters of the grant, perfection
and priority of security interests the subject hereof, shall
constitute a security agreement within the meaning of the Uniform
Commercial Code of the States in which the Trust Property is located.
If a Credit Agreement Event of Default shall occur, then in addition
to having any other right or remedy available at law or in equity, the
Agent may proceed under the applicable Uniform Commercial Code and
exercise such rights and remedies as may be provided to a secured
party by such Uniform Commercial Code with respect to all or any
portion of the Trust Property which is personal property (including
without limitation taking possession of and selling such property). If
the Agent shall elect to proceed under the Uniform Commercial Code,
then fifteen (15) days' notice of sale of the personal property shall
be deemed reasonable notice and the reasonable expenses of retaking,
holding, preparing for sale, selling and the like incurred by the
Agent shall include, but not be limited to, attorneys' fees and legal
expenses. At the Agent's request, the Borrower shall assemble such
personal property and make it available to the Agent at a place
designated by the Agent which is reasonably convenient to both
parties.
(b) The Borrower, upon request by the Agent from time to
time, shall execute, acknowledge and deliver to the Agent one (1) or
more separate security agreements, in
<PAGE> 11
form satisfactory to the Agent, covering all or any part of the Trust
Property and will further execute, acknowledge and deliver, or cause
to be executed, acknowledged and delivered, any financing statement,
affidavit, continuation statement or certificate or other document as
the Agent may request in order to perfect, preserve, maintain,
continue or extend the security interest under, and the priority of
the Liens granted by, this Security Agreement and such security
instrument. The Borrower further agrees to pay to the Agent (with
funds provided by the Lessee for such purpose) on demand all costs and
expenses incurred by the Agent in connection with the preparation,
execution, recording, filing and re-filing of any such document and
all reasonable costs and expenses of any record searches for financing
statements the Agent shall reasonably require. The filing of any
financing or continuation statements in the records relating to
personal property or chattels shall not be construed as in any way
impairing the right of the Agent to proceed against any property
encumbered by this Security Agreement.
12. AUTHORITY OF THE AGENT.
The Borrower acknowledges that the rights and responsibilities of the
Agent under this Security Agreement with respect to any action taken by the
Agent or the exercise or non-exercise by the Agent of any option, voting right,
request, judgment or other right or remedy provided for herein or resulting or
arising out of this Security Agreement shall be governed by the Credit
Agreement and Section 8.6 of the Participation Agreement and by such other
agreements with respect thereto as may exist from time to time (until such time
as all amounts due and owing to the Secured Parties and the Agent under the
Operative Agreements have been paid in full), but the Agent shall be
conclusively presumed to be acting as agent for the Secured Parties with full
and valid authority so to act or refrain from acting, and the Borrower shall be
under no obligation, or entitlement, to make any inquiry respecting such
authority.
13. NOTICES.
All notices required or permitted to be given under this Security
Agreement shall be in writing and delivered as provided in Section 12.2 of the
Participation Agreement.
14. SEVERABILITY.
Any provision of this Security Agreement which is prohibited or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof.
15. AMENDMENT IN WRITING; NO WAIVERS; CUMULATIVE REMEDIES.
(a) None of the terms or provisions of this Security
Agreement may be waived, amended, supplemented or otherwise modified
except in accordance with the terms of Section 12.4 of the
Participation Agreement.
<PAGE> 12
(b) No failure to exercise, nor any delay in exercising,
on the part of the Agent, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Agent of any right or remedy hereunder on
any one (1) occasion shall not be construed as a bar to any right or
remedy which the Agent would otherwise have on any future occasion.
(c) The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not
exclusive of any other rights or remedies provided by law.
16. SECTION HEADINGS.
The section headings used in this Security Agreement are for
convenience of reference only and are not to affect the construction hereof or
be taken into consideration in the interpretation hereof.
17. SUCCESSORS AND ASSIGNS.
This Security Agreement shall be binding upon the successors of the
Borrower, and the Borrower shall not assign any of its rights or obligations
hereunder or with respect to any of the Trust Property without the prior
written consent of the Agent. This Security Agreement shall inure to the
benefit of the Agent, the Lenders, the Holders and their respective successors
and assigns, in accordance with their respective interest herein.
18. THE BORROWER'S WAIVER OF RIGHTS.
Except as otherwise set forth herein, to the fullest extent permitted
by law, the Borrower waives the benefit of all laws now existing or that may
subsequently be enacted providing for (a) any appraisement before sale of any
portion of the Trust Property, (b) any extension of the time for the
enforcement of the collection of the indebtedness or the creation or extension
of a period of redemption from any sale made in collecting such debt and (c)
exemption of any portion of the Trust Property from attachment, levy or sale
under execution or exemption from civil process. Except as otherwise set forth
herein, to the fullest extent the Borrower may do so, the Borrower agrees that
the Borrower will not at any time insist upon, plead, claim or take the benefit
or advantage of any law now or hereafter in force providing for any
appraisement, valuation, stay, exemption, extension or redemption, or requiring
foreclosure of this Security Agreement before exercising any other remedy
granted hereunder and the Borrower, for the Borrower and its successors and
assigns, and for any and all Persons ever claiming any interest in the Trust
Property, to the extent permitted by law, hereby waives and releases all rights
of redemption, valuation, appraisement, stay of execution, notice of election
to mature or declare due the whole of the Obligations and marshalling in the
event of foreclosure of the Liens hereby created.
<PAGE> 13
19. GOVERNING LAW.
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN SECTION 11(a) HEREOF, THIS
SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED, INTERPRETED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF North Carolina.
20. OBLIGATIONS ARE WITHOUT RECOURSE.
The provisions of the Participation Agreement relating to limitations on
liability are hereby incorporated by reference herein, Mutatis Mutandis.
21. PARTIAL RELEASE; FULL RELEASE.
The Agent may release for such consideration as it may require any
portion of the Trust Property without (as to the remainder of the Trust
Property) in any way impairing or affecting the Lien, security interest and
priority herein provided for the Agent compared to any other Lien holder or
secured party. Further, the Agent shall execute and deliver to the Borrower
such documents and instruments as may be required to release the Lien and
security interest created by this Security Agreement with respect to the
Properties as provided in Section 8.8 of the Participation Agreement or to
grant the easements and permit the other matters provided for in Section 8.5 of
the Participation Agreement.
22. MISCELLANEOUS.
(a) This Security Agreement is one (1) of the documents
which create Liens and security interests that secure payment and
performance of the Obligations. The Agent, at its election, may
commence or consolidate in a single action all proceedings to realize
upon all such Liens and security interests. The Borrower hereby waives
(i) any objections to the commencement or continuation of an action to
foreclose the Lien of this Security Agreement or exercise of any other
remedies hereunder based on any action being prosecuted or any
judgment entered with respect to the Obligations or any Liens or
security interests that secure payment and performance of the
Obligations and (ii) any objections to the commencement of,
continuation of, or entry of a judgment in any such other action based
on any action or judgment connected to this Security Agreement. In
case of a foreclosure sale, the Trust Property may be sold, at the
Agent's election, in one (1) parcel or in more than one (1) parcel and
the Agent is specifically empowered (without being required to do so,
and in its sole and absolute discretion) to cause successive sales of
portions of the Trust Property to be held.
(b) This Security Agreement may not be amended, waived,
discharged or terminated except in accordance with Section 12.4 of the
Participation Agreement. Upon the prior written consent of the
Majority Secured Parties and unless such matter is a Unanimous Vote
Matter, the Agent may release any portion of the Trust Property or any
other security, and grant such extensions and indulgences in relation
to the Obligations
<PAGE> 14
secured hereby without in any manner affecting the priority of the
Lien hereof on any part of the Trust Property.
(c) THE PROVISIONS OF THE PARTICIPATION AGREEMENT
RELATING TO SUBMISSION TO JURISDICTION, VENUE AND ARBITRATION ARE
HEREBY INCORPORATED BY REFERENCE HEREIN, MUTATIS MUTANDIS.
23. CONFLICTS WITH PARTICIPATION AGREEMENT.
Notwithstanding any other provision hereof, in the event of any
conflict between the terms of this Security Agreement and the Participation
Agreement, the terms of the Participation Agreement shall govern.
24. LESSEE AS A PARTY.
LESSEE HAS EXECUTED THIS SECURITY AGREEMENT FOR THE PURPOSE OF
SUBJECTING TO THE SECURITY INTERESTS GRANTED HEREUNDER ALL OF ITS RIGHT, TITLE,
ESTATE AND INTEREST, IF ANY, IN AND TO THE TRUST PROPERTY TO SECURE ITS
OBLIGATIONS UNDER THE OPERATIVE AGREEMENTS. ACCORDINGLY, LESSEE HEREBY GRANTS
TO THE AGENT (FOR THE BENEFIT OF THE LENDERS AND THE HOLDERS) A SECURITY
INTEREST IN AND TO ALL OF ITS RIGHT, TITLE, ESTATE AND INTEREST, IF ANY, IN AND
TO THE TRUST PROPERTY (TO THE EXTENT LESSEE HAS ANY RIGHT, TITLE OR INTEREST
THEREIN AND WITHOUT REGARD TO ANY LANGUAGE IN SECTION 2 OR THE DEFINITION OF
"TRUST PROPERTY' OR ANY DEFINITION OF ANY ITEM CONSTITUTING THE TRUST PROPERTY
WHICH OTHERWISE WOULD LIMIT THE TRUST PROPERTY TO THE RIGHT, TITLE AND INTEREST
OF THE BORROWER THEREIN) TO SECURE ITS OBLIGATIONS UNDER THE OPERATIVE
AGREEMENTS. LESSEE ACKNOWLEDGES AND AGREES THAT, UPON THE OCCURRENCE OF AN
EVENT OF DEFAULT, THE AGENT SHALL HAVE THE RIGHT TO EXERCISE ANY OR ALL OF ITS
REMEDIES HEREUNDER AS AGAINST ANY SUCH RIGHT, TITLE, ESTATE OR INTEREST OF
LESSEE IN OR TO THE TRUST PROPERTY.
<PAGE> 15
IN WITNESS WHEREOF, each of the undersigned have caused the Security
Agreement to be duly executed and delivered as of the date first above written.
FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not individually, but solely As the
Owner Trustee under the AAI Realty Trust 1998-1
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
NationsBank, N.A., as the Agent for
the Lenders and the Holders
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
Accepted and Agreed to:
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In thousands, except per share amounts
Statement of Income Data:
Net sales $ 80,380 $ 65,401 $ 42,162 $ 34,639 $ 32,882
Cost of sales 39,962 33,378 17,621 14,259 14,533
Selling 8,618 8,362 6,357 4,913 4,390
General and administrative 17,536 15,207 8,908 8,171 8,485
Research and development 6,131 7,791 4,216 3,326 2,394
Unusual item (1) - - 6,600 - -
Other income (expense), net 437 1,373 494 (1,130) (440)
----------------------------------------------------------------------------------------------
Income (loss) before income taxes 8,570 2,036 (1,046) 2,840 2,640
Provision for income taxes (2) 2,869 781 2,102 39 -
Equity income (loss) - - - 444 (444)
- -----------------------------------------------------------------------------------------------
Net income (loss) $ 5,701 $ 1,255 $ (3,148) $ 3,245 $ 2,196
- -----------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.35 $ 0.08 $ (0.26) $ 0.31 $ 0.21
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding 16,322 16,290 12,039 10,348 10,317
- -----------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.35 $ 0.08 $ (0.26) $ 0.30 -
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding 16,417 16,459 12,039 10,667 -
- -----------------------------------------------------------------------------------------------
Pro forma data (unaudited) (2):
Net income, as reported $ 3,245 $ 2,196
Pro forma income taxes 1,129 1,118
- -----------------------------------------------------------------------------------------------
Pro forma net income $ 2,116 $ 1,078
- -----------------------------------------------------------------------------------------------
Pro forma earnings per share $ 0.20 $ 0.10
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding 10,667 10,317
- -----------------------------------------------------------------------------------------------
Balance Sheet Data, at period end:
Working capital $ 24,013 $ 32,637 $ 35,755 $ 12,374 $ (1,181)
Property and equipment, net 37,600 25,326 19,216 10,904 10,782
Total assets 109,257 100,449 104,478 39,156 22,402
Long-term debt 6,306 6,578 6,671 6,578 2,738
Total stockholders' equity (3) 72,950 66,076 63,995 21,990 5,856
</TABLE>
(1) In connection with the acquisition of L.A.B., the Company recognized an
unusual item representing the write-off of certain in-process research and
development costs with an appraised value of approximately $6.6 million as
of December 31, 1996.
(2) Pro forma information is presented prior to 1996 to reflect pro forma
provisions for income taxes for the periods prior to November 17,1995, when
the Company was treated as an S corporation for income tax purposes.
(3) The Company completed an initial public offering of its common stock in
September 1996.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the business of performing contract
development and support services for large and small pharmaceutical companies
around the world and the development of new technologies to improve drug
performance. In implementing this strategy, the Company earns revenue through
fee-for-service contracts with customers and by licensing and selling internally
developed formulas and products.
The fee-for service business consists of two main groups, an analytical
and a clinical group. The analytical group performs laboratory analysis of
various chemical compounds and small scale manufacturing of chemical compounds
used for further testing, or in some cases, for sale to the public. The services
performed by the analytical group include chemical analysis, chemical synthesis,
drug formulation, clinical supply and niche manufacturing, bio-analytical
studies, and regulatory and compliance consulting. All of these services involve
either laboratory work or consulting services. The clinical group performs
testing of new drugs for customers under controlled conditions as part of the
customers' process in gaining approval for the drug. All of the clinical
services involve contact with patients and monitoring clinical studies performed
in hospitals and clinics.
Both the analytical and clinical groups receive requests for services
from a customer, often on a competitive basis. An estimate of costs to perform
the service is delivered to the customer based on the expected resources and
materials required to complete the project. The projects vary in length, some
lasting less than one month and others lasting several years, however, most
projects may be cancelled by the customer with 30 days notice.
The product development business utilizes the resources and operating
capacity of the analytical and clinical groups to study and develop new
technologies that improve existing drugs. The Company licenses the developed
technologies and formulas to customers usually before the development is
complete. In general, the Company is partially paid for its efforts and
innovations at predefined events, defined as milestones, which are intended to
help cover the costs of development. The milestone payments are not refundable.
In most cases, the Company also receives royalties on the eventual sales of the
approved product. The Company bears the risk that some of the development
projects may not be approved or that the eventual sales of the product may not
meet expectations. These development projects generally last several years.
On December 31, 1996, the Company acquired L.A.B. Gesellschaft fur
pharmakologische Untersuchungen mbH & Co. ("L.A.B."), which is now named AAI
Deutschland, GmbH & Co. KG. The operations include analytical and clinical
operations located in Germany, clinical operations in France and the
Netherlands, and a sales office in England. The acquisition significantly
expanded the Company's bio-analytical capabilities and allowed the Company to
offer multi-center clinical testing services. Analytical and clinical work
conducted in Europe is generally interchangeable with work performed in the
United States for purposes of seeking U.S. regulatory approval. Thus, the
acquisition of L.A.B. provided the Company with significant additional capacity
for analytical and clinical services to its global client base.
On September 14, 1998, the Company acquired Kansas City Analytical
Services, Inc. ("KCAS"). KCAS provides bioanalytical services and has
significantly increased the bioanalytical capacity and expertise of the Company.
Prior to the acquisition of KCAS, the Company's primary bioanalytical operations
were located in Neu-Ulm, Germany.
2
<PAGE> 3
On March 16, 1999, the Company merged with Medical and Technical
Research Associates, Inc. ("MTRA") in a pooling-of-interests transaction for
approximately 1.3 million shares of stock, including conversion of MTRA stock
options. The addition of MTRA will bring a U.S. based clinical phase II-IV
operation to the Company and significantly increase the Company's clinical
presence and ability to compete for clinical projects.
This Annual Report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
those forward-looking statements. Factors that might cause such differences
include, but are not limited to, internal Company factors such as the management
of growth and acquisition risks and dependence on key personnel. The factors
that are outside the Company's control include government regulation, the level
of outsourcing in the pharmaceutical and biotechnology industries and the
dependence on third party marketing and distribution of internally developed
drugs.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Net sales increased by 23% in 1998 compared to 1997. The increase was
due in part to the acquisition of KCAS, without which the sales increase would
have been 19%. Fee-for-service sales increased 19% while product development
revenues increased 26% in 1998 over 1997.
Gross margins in the fee-for-service business increased to 46% from 44%
partly due to the inclusion of KCAS in 1998. Without KCAS, 1998 margins would
have been 45%.
Selling expenses increased by 1% but decreased as a percentage of sales
from 13% to 11% in 1998 from 1997 levels. General and administrative expenses
increased by 15% in 1998, but decreased as a percentage of fee for service
revenues to 22% in 1998 from 23% in 1997. The increase was due mainly to
increases in staff costs which support the higher volumes and revenues. Both
selling and general and administrative expenses decreased as a percentage of
fee-for-service revenues in 1998 from 1997 levels. Management believes that
while dollar levels of selling and administrative spending will increase, the
level of spending as a percentage of revenues will continue to decline in future
years.
Research and development expenses decreased by 21% in 1998 from 1997
levels. Overall research spending as a percent of net sales also decreased from
12% in 1997 to 8% in 1998. The decrease was due partially to the stage of
development of the internal products. In addition, this decrease was partially
due to the Company internally performing various research activities which had
previously been sent to outside parties. The Company was able to perform these
research activities internally as a result of its acquisitions of L.A.B., KCAS
and through internal expansion. Management believes that performing high cost
research activities with internal resources (which will be further enhanced with
the addition of MTRA) will continue to provide a lower level of research
expenses as a percentage of net sales than had been experienced in prior years.
1997 COMPARED TO 1996
Net sales increased by 55% in 1997 compared to 1996. The increase in
net sales was primarily attributable to the inclusion of L.A.B. net sales in
1997. The fee-for-service sales increased by 47% in 1997 compared to 1996 and
product development revenues increased by nearly 300% in 1997 compared to 1996.
Gross margins in the fee-for-service business declined to 44% in 1997
compared to 57% in 1996. This decrease is primarily attributable to the
inclusion of L.A.B. in 1997 with lower operating margins than the historical
levels attained by AAI. Margins were also impacted by increases in professional
staffing in 1997 to meet increased client demand.
3
<PAGE> 4
Selling expense increased 32%, in 1997 compared to 1996, primarily as a
result of the inclusion of L.A.B. in 1997. Selling expense as a percent of net
sales declined to 13% in 1997 compared to 15% in 1996. General and
administrative expense increased 71% in 1997 compared to 1996, primarily as a
result of the inclusion of L.A.B. in 1997. General and administrative expense as
a percentage of net sales increased to 23% in 1997 from 21% in 1996. The Company
experienced a higher level of general corporate type expenses in 1997 as a
result of being a public company. Management believes these general corporate
type items should not increase significantly as a percent of net sales in future
years.
Research and development expense increased 85% in 1997 compared to
1996. Research and development expense represented 12% of net sales in 1997
compared to 10% of net sales in 1996. The increase in research and development
expense reflects the Company's decision to allocate an increasing proportion of
its development capabilities to internal product development to accelerate
certain drug development activities. The Company anticipates that research and
development expense will continue to increase over the next several years,
consistent with its business strategy of investing approximately 10% of net
sales.
The Company terminated certain business combination discussions during
the third quarter of 1997. In relation to these discussions, the Company
recognized a net credit of $400,000 in other income, representing a $1 million
payment made to its L.A.B. subsidiary and approximately $600,000 of expenses
incurred by AAI.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its business through cash flows from operations,
borrowings and the sale of equity. In 1998, $1.4 million of cash was generated
from operations. Cash was used in 1998 as follows: $4.0 million to acquire KCAS;
$14.1 million to purchase capital assets; and a $6.8 million increase in
non-cash working capital. The major capital assets purchased in 1998 include a
clinical supply manufacturing and distribution facility in Wilmington, North
Carolina, and the opening of an analytical facility in New Brunswick, New
Jersey.
In 1997, $13.0 million of cash was used by operations predominately to
increase non-cash working capital and $4.4 million was received through
additional borrowings. Cash was used to purchase capital assets in the amount of
$10.9 million.
In 1996, $45.0 million of cash was provided through the sale of equity
and $2.4 million was generated from operations. $7.6 million of cash was used in
1996 to purchase capital assets.
Capital assets purchased were for new equipment and facility
improvements to increase capacity and productivity. The Company anticipates
capital expenditures in 1999 to be at or below the 1998 level.
Working capital was $24.0 million at December 31, 1998 and $32.6
million at December 31, 1997. The Company has a $20 million credit facility
available to supplement its liquidity needs. The Company expects to continue
expanding its operations through internal growth and strategic acquisitions. The
Company expects such activities will be funded from existing cash and cash
equivalents, cash flow from operations and borrowings under its credit facility.
The Company believes that such sources of cash will be sufficient to fund
operations for the current and foreseeable future and to pay existing debt as it
becomes due and other capital obligations. The Company is constantly evaluating
acquisition or other growth opportunities. At some point in the future there may
be opportunities that require additional external financing, and the Company may
from time to time seek to obtain funds from the public or private issuance of
equity or debt securities. There can be no assurances that such financing will
be available on terms acceptable to the Company.
4
<PAGE> 5
YEAR 2000 DISCLOSURE
The Company has commenced efforts to assess and where required,
remediate, issues associated with Year 2000 (Y2K) issues. Generally defined, Y2K
issues arise from computer programs which use only two digits to refer to the
year and which may experience problems when the two digits become "00" in the
year 2000. In addition, imbedded hardware microprocessors may contain time and
two-digit year fields in executing their functions. Much literature has been
devoted to the possible effects such programs may experience in the Year 2000,
although significant uncertainty exists as to the scope and effect the Y2K
issues will have on industry and the Company.
The Company has recognized the need to address the Y2K issue in a
comprehensive and systematic manner and has taken steps to assess the possible
Y2K impact on the Company. Although the Company has not completed a 100%
assessment of all its information technology ("IT") and non-IT systems for Y2K
issues, the Company has completed its assessment of all mission-critical
systems. All mission-critical systems and most of the major applications and
hardware have been assessed to determine the Y2K impact and a plan is in place
for timely resolution of potential issues by the end of September 1999. In
addition, the Company is asking all of its significant vendors and clients for
an assessment of the impact of Y2K on their operations.
In 1996, the Company developed a strategic plan to identify the IT
systems needed to accomplish the Company's overall growth plans. As part of this
process, potential Y2K issues were considered and addressed through an
enterprise resource planning process. The Company's Board of Directors
authorized approximately $3 million of initial spending to implement portions of
this strategic plan.
In 1997, the Company established an internal multi-discipline task
force to specifically address Y2K issues. The task force has inventoried IT and
non-IT systems and made assessments as to Y2K compliance. In those instances
where a system would be replaced or eliminated through the implementation of our
strategic plan before being impacted by Y2K issues, no further action was deemed
necessary. All mission-critical systems not being addressed in the strategic
plan have been further assessed and protocols have been developed to test
compliance. This testing is ongoing. As issues are identified they are remedied
as soon as possible. In addition, as upgrades are made to the Company's
proprietary software, Company employees are revising the computer code to ensure
Y2K compliance. All Company purchase orders for new equipment and systems
contain representations regarding Y2K compliance. Based on our current
information, the non-IT systems used by the Company are not expected to cause
significant problems or expense to the Company. While AAI relies heavily on its
technical equipment, much of the equipment can be upgraded to Y2K compliant
versions. Items that are not mission-critical can continue to be operated if
they are not linked to other systems.
The Company has communicated with our major customers and suppliers and
is not aware of any such business associates that will cause a material
third-party risk to the Company. While management does not believe this issue
will materially affect its products, services or competitive condition, it has
not fully completed its assessment and remediation process at this time.
The cost of bringing the Company in full compliance should not result
in a material increase in the recent levels of capital spending or any material
one-time expenses. The Company has not been tracking the direct cost of solving
potential Y2K issues. Since 1996, the Company has spent approximately $3.7
million for all IT items. It is not reasonably possible to determine what
portion of such spending was directly related to correcting Y2K issues. This
amount includes spending on replacing systems, as well as upgrading existing
systems. The future spending on IT items is expected to be approximately $2
million per year. Again, the Company has not segregated the direct costs
associated with Y2K issues in its IT capital spending plans.
5
<PAGE> 6
The failure of either the Company, its vendors or clients to correct
the systems affected by Y2K issues could result in a disruption or interruption
of business operations. The Company uses computer programs and systems in its
operations to collect, assimilate and analyze data. Failure of such programs and
systems could affect the Company's ability to perform contracts to test,
develop, or manufacture pharmaceutical and biotechnology products or perform
clinical trials, thereby causing delays in the development and commercialization
of pharmaceutical and biotechnology products. Similarly, failure of
vendor-provided products and services could result in delay of the Company's
internal development efforts. Although the Company does not believe that any of
the foregoing worst-case scenarios will occur, there can be no assurance that
unexpected Y2K problems of either the Company, its vendors or clients will not
have a material adverse effect on the Company.
While it is difficult to classify the Company's state of readiness,
management believes that the Company's internal plans should have the Company
ready by the end of 1999 to avoid any material Y2K issues. We are in the process
of completing the assessment, testing systems and developing contingency plans.
Management is in frequent communication with the task force and has made and
will continue to make reports to the Company's Board of Directors.
INFLATION
The Company believes the effects of inflation generally do not have a
material adverse effect on its results of operations or financial condition.
EURO CONVERSION
On January 1, 1999, the European Community began denominating
significant financial transactions in a new monetary unit, the Euro. The Euro is
intended to replace the traditional currencies of the individual EU member
countries. The Company's operations in Europe are continuing to operate in the
traditional currencies and are not converting internal financial systems to the
Euro as a functional currency. The Company's significant operations all have
multi-currency capable systems and will account for Euro denominated
transactions without additional modification or difficulty. The Company is
evaluating when to convert its local currency in Europe to the Euro with as
little disruption to customer and vendors as possible. The Company does not
intend to make such a conversion in 1999.
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Net sales (includes related party net
sales of $1,807, $5,170 and $10,916) $ 80,380 $ 65,401 $ 42,162
Operating costs and expenses:
Cost of sales 39,962 33,378 17,621
Selling 8,618 8,362 6,357
General and administrative 17,536 15,207 8,908
Research and development 6,131 7,791 4,216
Unusual item - - 6,600
- ------------------------------------------------------------------------------------------------------------
72,247 64,738 43,702
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations 8,133 663 (1,540)
Other income (expense):
Interest, net 239 608 511
Other 198 765 (17)
- ------------------------------------------------------------------------------------------------------------
437 1,373 494
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 8,570 2,036 (1,046)
Provision for income taxes 2,869 781 2,102
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,701 $ 1,255 $ (3,148)
- ------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.35 $ 0.08 $ (0.26)
- ------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 16,322 16,290 12,039
- ------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.35 $ 0.08 $ (0.26)
- ------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - diluted 16,417 16,459 12,039
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
in thousands, except share data
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,802 $ 26,219
Accounts receivable, net 22,130 19,415
Work-in-progress 15,570 8,968
Prepaid and other current assets 5,352 4,481
- -----------------------------------------------------------------------------------------------------
Total current assets 53,854 59,083
- -----------------------------------------------------------------------------------------------------
Property and equipment, net 37,600 25,326
Goodwill and other intangibles 15,509 13,747
Other assets 2,294 2,293
- -----------------------------------------------------------------------------------------------------
Total assets $ 109,257 $ 100,449
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
debt and short-term debt $ 6,627 $ 5,561
Accounts payable 5,494 4,005
Customer advances 6,818 7,869
Accrued wages and benefits 4,323 3,561
Other accrued liabilities 6,579 5,450
- -----------------------------------------------------------------------------------------------------
Total current liabilities 29,841 26,446
- -----------------------------------------------------------------------------------------------------
Long-term debt 6,306 6,578
Other liabilities 160 1,349
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Common stock, $.001 par value;100 million
shares authorized, 16,390,511 outstanding - 1998;
16,295,271 outstanding - 1997 16 16
Paid-in capital 68,687 67,550
Retained earnings (deficit) 4,365 (1,336)
Accumulated other comprehensive income (losses) (53) (5)
Stock subscriptions receivable (65) (149)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 72,950 66,076
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 109,257 $ 100,449
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,701 $ 1,255 $(3,148)
Adjustments to reconcile to net cash
(used) provided by operating activities:
Depreciation and amortization 4,958 5,116 2,062
Deferred income taxes 752 (510) 25
Unusual item - - 6,600
Other (487) 251 110
Changes in assets and liabilities:
Trade and other receivables (1,453) (9,610) (1,073)
Work-in-progress (5,838) 200 (969)
Prepaid and other assets, net (538) (2,225) (494)
Accounts payable 1,067 (4,090) 245
Customer advances (1,680) 540 (943)
Other accrued liabilities (1,049) (3,921) (48)
- ----------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 1,433 (12,994) 2,367
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (14,147) (10,929) (7,609)
Acquisition of L.A.B., net of cash acquired - - (2,206)
Acquisition of KCAS, net of cash acquired (4,008) - -
Short-term investment - 3,961 (3,961)
Other (34) (376) 31
- ----------------------------------------------------------------------------------------------------
Net cash used by investing activities (18,189) (7,344) (13,745)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds (payments) short-term debt 773 3,269 (2,656)
Proceeds from long-term borrowings - 1,128 -
Payments on long-term borrowings (617) (633) (565)
Issuance of common stock 1,080 600 44,794
Dividends - - (1,051)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,236 4,364 40,522
- ----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (15,520) (15,974) 29,144
Effect of exchange rate changes on cash 103 (32) -
Cash and cash equivalents, beginning of period 26,219 42,225 13,081
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $10,802 $26,219 $42,225
- ----------------------------------------------------------------------------------------------------
Supplemental information, cash paid for:
Interest $ 887 $ 870 $ 402
Income taxes $ 1,977 $ 1,378 $ 1,945
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 10
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
In thousands, except per share amount
<TABLE>
<CAPTION>
Accumulated Retained
Common Stock Class B Stock Other Earnings
--------------------------------------- Paid-in Comprehensive (Accumulated
Shares Amount Shares Amount Capital (1) Income Deficit) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 447 $ 150 9,993 $ 171 $ 21,510 $ - $ 308 $ 22,139
- -----------------------------------------------------------------------------------------------------------------------------------
Dividend adjustment - - - - - - 249 249
Stock award - - 105 490 (490) - - -
Establish common stock par
value of $0.001 per share - (150) - (651) 801 - - -
Sale of common stock 3,105 3 - - 44,788 - - 44,791
Conversion to common stock: -
Preferred stock (883 shares) 2,636 3 - - - - - 3
Class B common stock 10,098 10 (10,098) (10) - - - -
Stock options exercised - - - - 3 - - 3
Deferred compensation earned - - - - 110 - - 110
Net loss - - - - - - (3,148) (3,148)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 16,286 16 - - 66,722 - (2,591) 64,147
- -----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised 10 - - - 75 - - 75
Stock option tax benefits - - - - 525 - - 525
Stock award forfeitures (1) - - - - - - -
Deferred compensation earned - - - - 228 - - 228
Currency translation adjustment - - - - - (5) - (5)
Net income - - - - - - 1,255 1,255
--------------
Total comprehensive income 1,250
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 16,295 16 - - 67,550 (5) (1,336) 66,225
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued in acquisition of KCAS 27 - - - 291 - - 291
Stock options exercised 69 - - - 602 - - 602
Stock option tax benefits - - - - 99 - - 99
Stock award forfeitures - - - - (6) - - (6)
Deferred compensation earned - - - - 151 - - 151
Currency translation adjustment - - - - - (48) - (48)
Net income - - - - - - 5,701 5,701
--------------
Total comprehensive income 5,653
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 16,391 $ 16 - $ - $ 68,687 $ (53) $ 4,365 $ 73,015
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company is a multinational provider of contract research services
with its principal offices in the United States and Germany. The majority of
revenues are earned in the fee-for-service business as explained in Note 10, and
a portion of the Company's resources are devoted to research and development of
new products. Major customers are large and small pharmaceutical companies.
Basis of Presentation
The consolidated financial statements include the accounts of Applied
Analytical Industries, Inc. (the "Company" or "AAI") and its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated. The
Company has ownership of approximately 40%, on a fully diluted basis, of
Endeavor Pharmaceuticals Inc. ("Endeavor") which is accounted for under the
equity method.
Revenue Recognition
Revenues from fee-for-service contracts are recognized generally on a
percentage-of-completion basis as the work is performed. Licensing revenues are
recognized generally on a percentage-of-completion basis for interim contract
milestones. Contract milestones based on product approval are recognized when
the applicable product is approved. Royalty revenues are recognized as earned in
accordance with contract terms. Work-in-progress represents revenues recognized
prior to contract billing terms. Provisions for losses on contracts, if any, are
recognized when identified.
Income Taxes
Income taxes have been provided using the liability method in
accordance with Financial Accounting Standards Board ("FASB") Statement No. 109
"Accounting for Income Taxes". Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts.
11
<PAGE> 12
Earnings per Share
Basic earnings per share are based on the weighted average number of
common shares outstanding during the year. The weighted average number of common
shares outstanding was approximately 16,322,000, 16,290,000 and 12,039,000 in
1998, 1997 and 1996, respectively. Diluted earnings per share were computed
assuming that the weighted average number of shares was increased by the
conversion of stock options issued to employees and members of the Company's
Board of Directors. The diluted per share amounts reflect a change in the number
of shares outstanding (the "denominator") to include the options as if they were
converted to shares and issued. In each year presented, the net income (the
"numerator") is the same for both basic and diluted per share computations. The
following table provides a reconciliation of the denominators for the basic and
diluted earnings per share computations for each of the years ended December 31
(In thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Basic Earnings per Share:
Weighted average number of shares 16,322 16,290 12,039
Effect of Dilutive Securities:
Employee and Director stock options 95 169 -
------------------------------------
Diluted Earnings per Share:
Adjusted weighted average number of shares
and assumed conversions 16,417 16,459 12,039
====================================
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash pledged as
security has been included in cash as described in Note 4.
Accounts Receivable
Unbilled accounts receivable represent specific invoices that, in
keeping with certain client billing arrangements, are mailed to clients
approximately 15 days after the month during which the work was completed.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is recognized
using the straight-line method over the estimated useful lives of the assets.
Depreciable lives are 31.5 years for buildings and improvements and 3 to 15
years for equipment. Leasehold improvements are amortized over the lesser of the
asset life or the lease term. Depreciation expense was approximately $4.2
million, $4.4 million and $2.0 million for the years ending December 31, 1998,
1997 and 1996, respectively.
12
<PAGE> 13
Goodwill, Intangibles and Other Assets
Goodwill, the excess of the purchase price over the fair value of the
net assets of acquired companies, is amortized over 20 years. At December 31,
1998 and 1997, the amounts for accumulated amortization of goodwill were
approximately $806,000 and $694,000 respectively. Other identifiable intangible
assets are amortized, if applicable, on a straight-line basis over their
estimated useful lives, which range from 3 to 17 years. At December 31, 1998 and
1997, the amounts of accumulated amortization of other intangibles were
approximately $446,000 and $228,000 respectively.
The Company has an investment in non-voting, mandatorily redeemable
preferred stock of a related party, which is carried at original cost in other
assets.
The carrying values of goodwill, intangibles and other assets are
reviewed if the facts and circumstances indicate potential impairment of their
carrying value. Any impairment in the carrying value of such assets is recorded
when identified.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated
into U.S. dollars in accordance with FASB Statement No. 52 "Foreign Currency
Translation". All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported in other comprehensive income. The effect on the statements of income
of transaction gains and losses is insignificant for all years presented.
Impact of Recently Issued Accounting Standards
During 1998, the FASB issued Statement No. 130 "Reporting Comprehensive
Income". The statement requires the Company to provide disclosure of all changes
in equity resulting from recognized transactions of the period other than
transactions with owners. The FASB also issued Statement No. 131 "Disclosures
about Segments of an Enterprise and Related Information". This statement
requires that the Company disclose certain information about its major business
lines, as well as certain geographic information. The Company has adopted both
statements.
In June 1998, the FASB issued Statement No. 133 "Accounting for
Derivative and Hedging Activities" which is required to be adopted in years
beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, if any, management does not anticipate that the adoption of this
statement will have a material impact on net earnings or the financial position
of the Company.
Stock Based Compensation
The Company grants stock options to certain employees with an exercise
price equal to the fair market value at the date of grant. The Company accounts
for stock option grants in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Because the exercise price of the stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
the preferred stock investment, current liabilities and long-term debt
approximate fair value. It is not practicable to estimate the fair value of the
Company's equity investments, which is recorded at zero, as no readily
determinable market exists for investments in such entities.
13
<PAGE> 14
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from such
estimates and changes in such estimates may affect amounts reported in future
periods.
2. ACQUISITIONS AND UNUSUAL ITEM
Kansas City Analytical Services, Inc.
On September 14, 1998, the Company acquired all of the outstanding
equity of Kansas City Analytical Services, Inc. (KCAS), a bioanalytical and
pharmaceutical analysis laboratory located near Kansas City, Kansas. The
acquisition has been accounted for using the purchase method of accounting. The
aggregate purchase price was approximately $5.5 million, consisting of cash
($5.2 million) and the issuance of 26,642 shares of common stock. The excess of
the purchase price over the fair value of the assets acquired was $1.5 million
and has been recorded as goodwill which is being amortized on a straight line
basis over 20 years. Accordingly, the results of KCAS's operations have been
included in the Company's consolidated results from the date of acquisition.
L.A.B. Gesellschaft fur pharmakologische Untersuchungen mbH & Co.
On December 31, 1996, the Company acquired all the outstanding equity
in L.A.B. Gesellschaft fur pharmakologische Untersuchungen mbH & Co. (L.A.B.), a
European contract research and development organization head-quartered in
Neu-Ulm, Germany with operational units in Neu-Ulm and Munich, Germany as well
as in France, Netherlands and England.
The aggregate purchase price for L.A.B. was approximately $20.5
million, which included payments to former equity holders, L.A.B. debt and
negative working capital. The acquisition has been accounted for using the
purchase method of accounting. The consolidated financial statements reflect the
allocation of the purchase price to the fair value of the assets acquired,
including original goodwill of approximately $12.8 million which is being
amortized on a straight-line basis over 20 years. Goodwill was adjusted during
1997 by approximately $2.0 million to reflect resolution of certain
pre-acquisition contingencies. The results of operations for L.A.B. are included
in the consolidated financial statements of AAI in 1997 and 1998.
In connection with the acquisition of L.A.B., the Company recognized an
unusual item representing the write-off of certain in-process research and
development costs with an appraised value of approximately $6.6 million as of
December 31, 1996.
The following table reflects the unaudited pro forma combined results
of operations of AAI, L.A.B. and KCAS as if the acquisitions had occurred on
January 1, 1996. Such pro forma information is presented for informational
purposes only and is not necessarily indicative of the consolidated results that
would have been achieved had the acquisition been consummated as of that time.
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands, except per
share amounts (unaudited)
Net sales $85,363 $71,204 $ 67,557
Net income (loss) $ 6,075 $ 1,288 $ (7,710)
Diluted earnings (loss) per share $ .37 $ .08 $ (.64)
</TABLE>
14
<PAGE> 15
3. INCOME TAXES
The following table presents the components for the provision for
income taxes.
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands
Income (loss) before income taxes:
United States $ 8,368 $ 2,165 $ 5,554
Non-U.S. 202 (129) (6,600)
- ----------------------------------------------------------------------------------
Net income before taxes $ 8,570 $ 2,036 $(1,046)
- ----------------------------------------------------------------------------------
Provision for income taxes:
Current:
Federal $ 1,972 $ 1,228 $ 1,709
Non-U.S. 31 63 -
State 135 - 368
- ----------------------------------------------------------------------------------
Total current taxes 2,138 1,291 2,077
- ----------------------------------------------------------------------------------
Deferred:
Federal 627 (365) 18
Non-U.S. - - -
State 104 (145) 7
- ----------------------------------------------------------------------------------
Total deferred taxes 731 (510) 25
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Total income taxes $ 2,869 $ 781 $ 2,102
- ----------------------------------------------------------------------------------
</TABLE>
The following table presents the reconciliation of the provision for
income taxes to the amount computed by applying the U.S. federal statutory
income tax rate.
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
In thousands
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 8,570 $ 2,036 $ (1,046)
- ----------------------------------------------------------------------------------
Tax expense (benefit) using statutory
U.S. income tax rate of 34% $ 2,914 $ 692 $ (356)
State income taxes, net 194 (96) 247
Permanent items, net 198 286 35
Research and Development credits (400) (411) (173)
Non-U.S. operations, net (37) 107 -
Write-off of in-process R&D - - 2,244
Other, net - 203 105
- ----------------------------------------------------------------------------------
Provision for income taxes $ 2,869 $ 781 $ 2,102
- ----------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred taxes are included in prepaids and other current assets and
other accrued liabilities. The following table presents the deferred tax assets
and deferred tax liability.
<TABLE>
<CAPTION>
December 31, 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
In thousands
Deferred tax assets, resulting from:
Accrued liabilities $ 84 $ 272
Accounts receivable 299 483
Write-off of in-process R&D 2,740 2,826
Non-U.S. net operating losses 1,918 1,745
Tax credits - 226
Other items 345 139
Deferred tax liability, resulting from:
Property and equipment (957) (619)
Valuation allowances on tax assets (4,658) (4,571)
- ---------------------------------------------------------------------
Net deferred tax assets (liability) $ (229) $ 501
- ---------------------------------------------------------------------
</TABLE>
Valuation allowances have been provided for certain assets resulting
from the L.A.B. acquisition since realization of such assets cannot be
predicted with reasonable certainty at this time.
4. DEBT AND CREDIT LINE
The following table presents the components of current maturities of
long-term debt and short-term debt.
<TABLE>
<CAPTION>
December 31, 1998 1997
In thousands
<S> <C> <C>
Industrial revenue bonds $ 900 $ 1,125
Bank debt 5,117 3,778
Current maturities of long-term debt 610 658
- ---------------------------------------------------------------------------------------------
Total short-term debt and current maturities of long-term debt $ 6,627 $ 5,561
- ---------------------------------------------------------------------------------------------
</TABLE>
The following table presents the components of long-term debt.
<TABLE>
<CAPTION>
December 31, 1998 1997
In thousands
<S> <C> <C>
Bank term loans $ 6,916 $ 7,180
Other - 56
- -------------------------------------------------------------------------
Total long-term debt 6,916 7,236
- -------------------------------------------------------------------------
Less current maturities of long-term debt (610) (658)
- -------------------------------------------------------------------------
Total long-term debt due after one year $ 6,306 $ 6,578
- -------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
The industrial revenue bonds were secured to finance the acquisition
and construction of facilities in North Carolina. They have a variable interest
rate, which is adjusted annually with a maximum allowable rate of 15%. The rates
at December 31, 1998 and 1997 were 4.15% and 4.35%, respectively. The bonds are
payable in monthly installments of $25,000, plus interest, through November
2000, and are redeemable at the option of the bondholders. The Company has
entered into an agreement with a bank to pay any bonds redeemed under a stand-by
letter of credit covering the outstanding principal of the bonds. The Company
also has a bond re-marketing agreement with such bank to re-market any bonds
presented for early redemption, on a best efforts basis. These bonds have been
classified as short-term debt because of the early redemption feature.
The bank term loans include approximately $2.1 million and $2.7 million
with a U.S. bank as of December 31, 1998 and 1997 respectively. The loans have
variable interest rates based on the 30-day LIBOR rate plus a margin based on
the Company's debt to equity ratio. The loans are payable in monthly
installments including interest. The average interest rate on these loans was
6.9% and 7.2% for 1998 and 1997, respectively. The bank term loans also include
approximately 8 million Deutsche marks, as of December 31, 1998 and 1997. This
amount represents a subsidiary's note payable to a German bank, which is due in
March 2000 with interest payable quarterly at 4.85%. AAI has issued a stand-by
letter of credit to this bank to cover borrowings outstanding. Approximately
$6.8 million of cash is held in certificates of deposit, pledged as security for
the letter of credit.
In 1996, the Company entered into a revolving credit agreement with a
U.S. bank which, as amended, expires in May 1999. The agreement provides for
borrowings of up to $20 million at variable interest rates, adjusted quarterly.
The rates are be based on the 30-day LIBOR rate and can be reduced or increased
depending on certain financial ratios of the Company at the end of each quarter.
At the end of the revolving credit period, any outstanding balances under this
facility convert to a term loan payable in monthly installments, including
interest, through the year 2004. The agreement requires the payment of a nominal
commitment fee based on the unused portion of the line of credit. There were no
amounts outstanding under this agreement at December 31, 1998 or 1997.
Under the terms of the revolving credit facility and the stand-by
letter of credit agreement, the Company is required to comply with various
covenants including, but not limited to, those pertaining to maintenance of
certain financial ratios, and incurring additional indebtedness. The Company was
in compliance with these covenants at December 31, 1998.
Scheduled maturities of long-term debt as of December 31, 1998 are
$610,000 - 1999; $5,405,000 - 2000; $458,000 - 2001; and $443,000 - 2002.
5. STOCKHOLDERS' EQUITY
The authorized capital stock of the Company at December 31, 1998 and
1997 was 100 million shares of voting common stock, $0.001 par value per share,
and 5 million shares of preferred stock, $0.001 par value per share. The
preferred stock is issuable in one or more series by the Company's Board of
Directors without further stockholder approval. No preferred stock was
outstanding at December 31, 1998 or 1997. The Company has reserved 2,057,636
shares of common stock for issuance under stock option plans.
AAI completed an initial public offering of 3,105,000 shares of common
stock, with net proceeds to the Company of approximately $45 million, in
September 1996 (the "IPO"). Upon the completion of the IPO the Company's then
outstanding Class B common stock, $0.001 par value per share, and Series A
convertible preferred stock, $0.001 par value per share ("Series A Preferred"),
converted to a single class of common stock. Prior to the IPO, the Board of
Directors authorized two stock splits for all common stock resulting in a net
increase to shares outstanding of 126.5 to 1. All numbers of common shares and
per share amounts in the accompanying financial statements were retroactively
adjusted to reflect these stock splits.
17
<PAGE> 18
Stock Option and Award Plans
In 1996, the Board of Directors awarded 104,696 shares of common stock
to certain employees and officers of the Company. The fair value at the time of
such award is recognized as deferred compensation in paid-in capital and was
expensed over a two-year period.
The Company has three stock option plans, the 1997 Stock Option Plan
("1997 Plan"), the 1996 Stock Option Plan ("1996 Plan") and the 1995 Stock
Option Plan ("1995 Plan"). Under the 1995 Plan, the Board of Directors may grant
options to purchase up to 242,538 shares of common stock. However, the Company
has no obligation to issue the shares upon exercise of such options until it has
purchased an equal number of shares from certain existing stockholders. Under
the 1997 and 1996 Plans, the Board of Directors may grant options to purchase up
to 1,644,000 and 495,627, respectively, newly issued shares of common stock. The
plans require that the exercise price of options cannot be less than either 100%
(1997 Plan) or 75% (1996 and 1995 Plans) of the estimated fair market value of
the Company's shares of common stock on the date of grant.
The combined activity from all plans is presented in the following
table.
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
- -----------------------------------------------------------------------
<S> <C> <C>
Outstanding, January 1, 1997 442,755 $ 8.35
- -----------------------------------------------------------------------
Granted 508,100 14.74
Exercised (92,023) 8.36
Forfeited (176,480) 15.02
- -----------------------------------------------------------------------
Outstanding, December 31, 1997 682,352 11.39
- -----------------------------------------------------------------------
Exercisable, December 31, 1997 124,413 8.35
- -----------------------------------------------------------------------
Granted 977,100 13.02
Exercised (76,679) 9.02
Forfeited (199,245) 11.87
- -----------------------------------------------------------------------
Outstanding, December 31, 1998 1,383,528 $ 12.61
- -----------------------------------------------------------------------
Exercisable, December 31, 1998 207,242 $ 10.84
- -----------------------------------------------------------------------
</TABLE>
Information regarding stock options outstanding at December 31, 1998 is
summarized in the table below.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Remaining Exercise Shares Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$8.350 - $12.720 346,596 8.38 $10.413 139,920 $ 9.240
$12.813 770,400 9.34 12.813 - -
$13.625 - $22.000 266,532 8.69 14.854 67,322 14.159
--------- ---- ------- ------- -------
$8.350 - $22.000 1,383,528 8.98 $12.605 207,242 $10.838
</TABLE>
18
<PAGE> 19
The weighted average fair value in excess of the exercise price at date
of grant for options granted during 1998 and 1997 was $6.87 and $7.84 per
option, respectively. The fair value of options at date of grant was estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected life (5 years); interest rate (5.1% - 1998, 5.9 % - 1997);
volatility factor (55% - 1998, 54% - 1997) and dividend yield (none).
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans; therefore, compensation expense has not
been recognized for all options granted. If compensation cost for the Company's
plans had been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement 123, the
Company's net income (loss) and diluted earnings (loss) per share would have
been changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Net income (loss):
As reported $ 5,701 $ 1,255 $ (3,148)
Pro forma $ 4,577 $ 771 $ (3,323)
Earnings (loss) per share:
As reported -
Basic $ 0.35 $ 0.08 $ (0.26)
Diluted $ 0.35 $ 0.08 $ (0.26)
Pro forma -
Basic $ 0.28 $ 0.05 $ (0.28)
Diluted $ 0.28 $ 0.05 $ (0.28)
</TABLE>
6. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Endeavor
In 1994, AAI organized Endeavor with Berlex Laboratories, Inc. and
several other investors to fund the development of hormone pharmaceutical
products, initially focusing on several generic hormone products already under
development by the Company. AAI obtained a 47% equity interest in Endeavor
through the contribution of its accumulated product research and development and
technical know-how. The other investors contributed cash in exchange for their
interests which, for all investors, was in the form of convertible preferred
stock. Based on a subsequent cash infusion by a new investor in 1995, the
Company's interest in Endeavor was diluted to approximately 40%, on a fully
diluted basis.
The Company's initial investment in Endeavor was recorded at zero. The
gain for its share of the cash contributed by the other investors was deferred
over the period the proceeds from such equity were expended by Endeavor. Due to
a commitment to provide financial support under a line of credit, AAI recognized
a liability for its proportionate share of Endeavor's losses, net of
amortization of the deferred gain, in 1994 and part of 1995. As a result of the
1995 cash infusion from a third party, the Company was repaid all amounts
outstanding under the line of credit and terminated its obligation to provide
any further funding under such line of credit. Since AAI had no requirement to
provide any additional funding to Endeavor, the previously recorded liability
was reversed in 1995.
19
<PAGE> 20
This investment has been recorded at zero value since 1995. Endeavor
has accumulated losses of approximately $16 million. The Company will not be
able to record any income from this investment until Endeavor has earned income
in an amount equal to such accumulated losses and becomes profitable
The Company had net sales to Endeavor for product development services
of approximately $1.6 million, $3.2 million and $6.2 million (15% of AAI net
sales) for the years ended December 31, 1998, 1997 and 1996, respectively. These
services are provided on terms and conditions management believes are comparable
to those afforded unrelated entities. Additionally, AAI had approximately $2.3
million in accounts receivable at December 31, 1997 and approximately $1.6
million and $184,000 in work-in-progress related to Endeavor at December 31,
1998 and 1997, respectively.
The Company has agreed, upon the completion of a specified development
milestone, to grant Endeavor an option to lease or purchase certain production
space, at fair market value, intended for use by AAI in manufacturing Endeavor's
products. The facilities subject to this option are currently used by the
Company. The Company has also agreed to permit Endeavor, under certain
circumstances, the first right to purchase additional proprietary hormone
pharmaceutical products developed by AAI.
Aesgen, Inc.
Aesgen, Inc. ("Aesgen") was formally organized with an affiliate of the
Mayo Clinic and MOVA Pharmaceutical Corporation and funded in 1995 through the
issuance of approximately $11 million of nonconvertible, non-voting, mandatorily
redeemable, preferred stock. The Company made a cash investment of $1.6 million
in such preferred stock, which is carried at cost, and is included in other
non-current assets on the balance sheet. As the Company did not intend to hold
an equity interest in Aesgen, it entered into a series of related transactions
commencing in 1995 to transfer to a corporation owned by the holders, at that
time, of substantially all of the outstanding capital stock of the Company, all
of its shares of Aesgen common stock in return for $50,000 (amount paid by AAI
for such shares) and such corporation's assumption of an obligation to invest an
additional $1.2 million in Aesgen.
The Company provides product development services to Aesgen at terms and
conditions that management believes are similar to those afforded unrelated
entities. In 1996, the Company sold to Aesgen marketing rights to a product
under development by the Company. Under the agreement, Aesgen paid a license fee
and will pay additional royalties upon marketing the product. AAI recognized net
sales of approximately $0.2 million, $1.9 million and $4.7 million (11% of AAI
net sales) from Aesgen for the years ended December 31, 1998, 1997 and 1996,
respectively. AAI also had accounts receivable of approximately $555,000 from
Aesgen at December 31, 1997, and work-in-progress of approximately $145,000 and
$97,000 at December 31, 1998 and 1997 respectively. AAI has the right, under its
development agreement with Aesgen, to provide certain product development and
support services to Aesgen with respect to some generic drugs currently being
developed by Aesgen, provided that AAI's fees for such services are comparable
to those of a competitor. In addition, under such development agreement, the
Company has agreed not to develop, for its own account or any other person, a
formulation of any of the generic products currently under development for
Aesgen and any additional drugs that AAI agrees to develop in the future for
Aesgen.
20
<PAGE> 21
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
The following table presents the components of accounts receivable.
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
In thousands
Trade and other:
Billed $18,395 $13,496
Unbilled 3,195 3,161
Related parties 980 2,867
- -------------------------------------------------------------------------
Total accounts receivable 22,570 19,524
Allowance for doubtful accounts (440) (109)
- -------------------------------------------------------------------------
Total accounts receivable, net $22,130 $19,415
- -------------------------------------------------------------------------
</TABLE>
In February 1997, one of the Company's investments in commercial paper
for approximately $4 million was not redeemed because of a cancellation of the
writer's credit facility supporting their commercial paper. This company began
making payments for principal and interest during 1997. In October 1997,
management made the decision to sell a portion of this investment and reserve
for a loss on the remaining holdings.
The following table presents the components of property and equipment.
<TABLE>
<CAPTION>
December 31, 1998 1997
In thousands
<S> <C> <C>
Land $ 990 $ 945
Buildings and improvements 14,491 10,882
Machinery and equipment 42,116 27,295
Construction-in-progress 4,801 1,586
- -------------------------------------------------------------------------
Total cost of property and equipment 62,398 40,708
Less, accumulated depreciation (24,798) (15,382)
- -------------------------------------------------------------------------
Property and equipment, net $ 37,600 $ 25,326
- -------------------------------------------------------------------------
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for all domestic AAI employees
with one year of service through a defined contribution plan qualified under
section 401(k) of the Internal Revenue Code of 1986, as amended. Participants
may elect to contribute a portion of their annual compensation, subject to
limitations. The Company makes matching contributions equal to 50% of a
participant's contribution up to a certain amount. Additionally, the Company
makes profit-sharing contributions at the discretion of the Board of Directors.
The Company has expensed $300,000, $219,000 and $557,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
21
<PAGE> 22
9. COMMITMENTS AND CONTINGENCIES
The Company leases land, buildings and equipment under renewable lease
agreements classified as operating leases. Rent expense under these agreements
for the years ended December 31, 1998, 1997 and 1996 was $2.5 million, $2.8
million, and $1.3 million, respectively. Future minimum rentals due under lease
agreements as of December 31, 1998 are $3.2 million - 1999; $2.9 million - 2000;
$2.5 million - 2001; $1.8 million - 2002; $1.8 million - 2003 and $8.3 million -
thereafter.
The Company is party to lawsuits and administrative proceedings
incidental to the normal course of its business. In connection with the 1995
issuance of the Series A Preferred, two of the Company's stockholders have
agreed to indemnify the Company for certain losses, if incurred. Management does
not believe that any liabilities related to such lawsuits or proceedings will
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
The Company has entered into an agreement with two banks which allows the
Company to lease a facility being built in Wilmington, North Carolina, adjacent
to the Company's laboratories. When the facility is complete, the Company will
enter into an operating lease for an initial period of 3 years with 2 one year
renewal periods. At the end of the initial term, the Company may elect to
purchase the facility at fair market value, extend the lease or the property may
be sold.
10. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
The Company operates in two business segments consisting of a
fee-for-service business and a product development business. In the
fee-for-service business, AAI is an integrated contract research organization
("CRO") to the worldwide pharmaceutical and biotechnology industries. In the
product development business, the Company internally develops drugs and
technologies with the objective of licensing marketing rights to third parties
in exchange for license fees and royalties. The Company does not independently
commercialize products developed internally or otherwise directly compete with
its pharmaceutical clients in the marketing or distribution of products. The
majority of the Company's non-U.S. operations are located in Germany.
22
<PAGE> 23
In determining income from operations, costs are allocated to the
product development business based upon direct labor and materials plus an
allocation of general overhead. The corporate line includes general corporate
overhead costs and goodwill amortization, which are not directly attributable to
a business segment.
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
(In thousands)
NET SALES:
Fee-for-service $ 73,126 $ 59,631 $ 40,624
Product Development 7,254 5,770 1,538
----------------------------------------
$ 80,380 $ 65,401 $ 42,162
----------------------------------------
United States $ 60,331 $ 47,959 $ 42,162
Non-U.S. 22,102 18,862 -
Less inter-geographic sales (2,053) (1,420) -
----------------------------------------
$ 80,380 $ 65,401 $ 42,162
----------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Fee-for-service $ 9,217 $ 4,965 $ 8,779
Product development 1,123 (2,021) (9,278)
Corporate (2,207) (2,281) (1,041)
----------------------------------------
$ 8,133 $ 663 $ (1,540)
----------------------------------------
United States $ 8,348 $ 1,799 $ 5,060
Non-US (215) (1,136) (6,600)
----------------------------------------
$ 8,133 $ 663 $ (1,540)
----------------------------------------
TOTAL ASSETS:
Fee-for-service $ 64,253 $ 54,670 $ 42,961
Product Development 4,874 5,812 4,378
Corporate 40,130 39,967 57,139
----------------------------------------
$109,257 $100,449 $104,478
----------------------------------------
United States $ 81,532 $ 78,328 $ 82,529
Non-U.S. 27,725 22,121 21,949
----------------------------------------
$109,257 $100,449 $104,478
----------------------------------------
</TABLE>
23
<PAGE> 24
11. SUBSEQUENT EVENT
On March 16, 1999, the Company merged with Medical and Technical Research
Associates, Inc., (MTRA) a clinical research organization located near Boston,,
Massachusetts for approximately 1.3 million shares of stock including conversion
of MTRA stock options. The merger will be accounted for as a
pooling-of-interests, and accordingly, historical financial information will be
restated in future periods to include MTRA data. The following table reflects
the unaudited combined results of continuing operations of the Company and MTRA
as though the merger would have occurred on January 1, 1996. The results include
only the results of other acquisitions (referred to in Note 2) form the date of
purchase forward.
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands, except per
share amounts (unaudited)
Net sales $98,243 $80,106 $ 53,728
Net income (loss) $ 6,539 $ 1,866 $ (2,462)
Diluted earnings (loss) per share $ 0.37 $ 0.10 $ (0.18)
</TABLE>
24
<PAGE> 25
Report of Independent Auditors
Applied Analytical Industries, Inc.
The Board of Directors and Shareholders of Applied Analytical Industries, Inc.
We have audited the consolidated balance sheet of Applied Analytical Industries,
Inc. and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Applied
Analytical Industries, Inc. and subsidiaries at December 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
February 12, 1999,
except Note 11, as to which the date is March 16, 1999
25
<PAGE> 26
Report of Independent Accountants
To the Board of Directors and Stockholders of
Applied Analytical Industries, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Applied
Analytical Industries, Inc. and its subsidiaries at December 31, 1997 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of the Company for any period subsequent to December 31, 1997.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 18, 1998
<PAGE> 27
Financial Results by Quarter (Unaudited)
In thousands, except per share amounts
<TABLE>
<CAPTION>
Quarter First Second Third Fourth
<S> <C> <C> <C> <C>
1998
Net sales $17,113 $19,426 $ 20,138 $23,703
Gross profit $ 8,616 $10,461 $ 10,284 $11,057
Net income (loss) $ 1,073 $ 1,306 $ 1,413 $ 1,909
Basic earnings (loss) per share $ 0.07 $ 0.08 $ 0.09 $ 0.12
Diluted earnings (loss) per share $ 0.07 $ 0.08 $ 0.09 $ 0.12
1997
Net sales $15,175 $15,814 $ 14,021 $20,391
Gross profit $ 7,684 $ 8,248 $ 6,027 $10,064
Net income (loss) $ 910 $ 583 $ (1,164) $ 926
Basic earnings (loss) per share $ 0.06 $ 0.04 $ (0.07) $ 0.06
Diluted earnings (loss) per share $ 0.06 $ 0.04 $ (0.07) $ 0.06
</TABLE>
Price range of common stock, traded on the NASDAQ market under the
symbol "AAII"(1):
<TABLE>
<S> <C> <C> <C> <C>
1998
High $19 1/8 $16 1/8 $14 5/8 $18 3/4
Low $13 1/4 $ 9 $ 9 5/8 $10
1997
High $27 1/2 $20 1/2 $27 1/4 $20 3/8
Low $17 1/2 $11 3/4 $19 1/16 $11 1/4
</TABLE>
(1) The Company estimates there were approximately 1,200 holders of record for
its common stock as of February 28, 1999. The Company has not declared any
cash dividends during 1998 or 1997.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF APPLIED ANALYTICAL INDUSTRIES, INC.
1. Applied Analytical Industries Italy, S.r.l.
2. Applied Analytical Industries Deutschland GmbH
3. AAI Vermogensverwaltungsgesellschaft mbH
4. L.A.B. Gesellschaft fur pharmakologische Untersuchungen mbH & Co.
5. AAI UK Limited
6. AAI Japan, Inc.
7. AAI Technologies, Inc.
8. AAI Properties, Inc.
9. Applied Analytical Industries Learning Center, Inc.
10. Kansas City Analytical Services, Inc.
11. Medical and Technical Research Associates, Inc.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Applied Analytical Industries, Inc. and subsidiaries of our report dated
February 12, 1999 (except for Note 11, as to which the date is March 16, 1999),
included in the 1998 Annual Report to Shareholders of Applied Analytical
Industries, Inc. and subsidiaries.
Our audit also included the financial statement schedule of Applied Analytical
Industries, Inc. and subsidiaries listed in Item 14. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement(s) on Form S-8 (Nos. 333-74515, 333-50841 and 333-50877) and the
Registration Statement(s) on Form S-3 (Nos. 333-5535) of our report dated
February 12, 1999 (except for Note 11, as to which the date is March 16, 1999)
with respect to the consolidated financial statements and schedule of Applied
Analytical Industries, Inc. and subsidiaries included in this Annual Report
(Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 30, 1999
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-74515, 333-50841 and 333-50877) of Applied
Analytical Industries, Inc. of our report dated March 18, 1998 listed in the
accompanying index under Item 14 in the Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page F-2 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APPLIED ANALYTICAL INDUSTRIES, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,802
<SECURITIES> 0
<RECEIVABLES> 22,570
<ALLOWANCES> 440
<INVENTORY> 0
<CURRENT-ASSETS> 53,854
<PP&E> 62,398
<DEPRECIATION> 24,798
<TOTAL-ASSETS> 109,257
<CURRENT-LIABILITIES> 29,841
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 72,934
<TOTAL-LIABILITY-AND-EQUITY> 109,257
<SALES> 80,380
<TOTAL-REVENUES> 80,380
<CGS> 39,962
<TOTAL-COSTS> 72,247
<OTHER-EXPENSES> (198)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (239)
<INCOME-PRETAX> 8,570
<INCOME-TAX> 2,869
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,701
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
